PPF is one of the best instruments to save on taxes and enjoy other long-term benefits. It can also come to your rescue during a financial emergency.
Public Provident Fund or PPF is amongst the most popular investment option as it offers both assured as well as tax-free returns to investors. Based on the exempt, exempt, exempt model the principal amount invested in PFF offers tax benefits under Section 80C while the interest earned is tax-free under Section 10 of the I-T Act. PPF also offers the option of premature withdrawals, loans and even pre-closures during a financial emergency.
Loans Against PPF Account
PPF has a long-term investment horizon and a lock-in period of 15 years but that should not be a reason for you to not consider investment in PPF. You can opt for a loan against your PPF account during any financial crunch. The loan, however, comes with some preconditions applied.
You can seek a loan against PPF investments starting from only the third financial year till the sixth financial year. If you have opened your PPF account in FY 2015-16, you will be eligible for a loan from FY 2017-18 till FY 2020-21. So effectively you can apply for a loan between April 1, 2017, and March 31, 2021.
The amount of loan you are eligible to seek is capped at 25% of the balance in your PPF account two years immediately preceding the year in which you apply for the loan. For example, if you apply for a PPF loan in FY 2017-18 your maximum loan eligibility will be 25% of the balance as on March 31, 2016, which is the last day of the end of the FY 2015-16.
Since the interest rates for PPF varies for each quarter, the applicable interest rates for the loan also varies accordingly. The interest rate for the PPF loan is charged at 2% plus the interest rate for the quarter fixed by the government. The good news is that once the interest rate is fixed for the loan it does not vary till the repayment is made for the loan up to the loan tenure of 36 months. Once you opt for a loan, ensure repayments of the loan within 36 months failing which the interest rate for the loan gets increased to 6% plus the interest rate for the quarter
Although PPF investments come with a 15-year lock-in period, there is an option for pre-mature withdrawal during a financial crunch. PPF withdrawals are available only after the seventh year of the opening of the PPF account. So if you opened a PPF account in 2015-16, you can opt for a premature withdrawal only after 7 years that is from April 1, 2021, onwards.
The maximum limit for withdrawal is also capped to 50% of the balance at the end of the 4th year preceding the year of withdrawal or 50% of the balance at the end of the immediate preceding year. PPF withdrawals are available only once a year and if at the time of withdrawal there is an unpaid loan, the loan amount will be deducted from the withdrawal amount.
Understanding Pre-closures For PPF Account
After the PPF account attains five financial years, there is a room for premature closure. Premature closure of PPF accounts is warranted only under special cases like if the account holder needs funds for treatment of serious ailments or life-threatening diseases or for higher education of either the account holder or of a minor account holder. Supporting relevant documentation must be submitted to seek any premature closure. On the downside, premature closure means that you as an account holder would be liable for an interest rate 1% lower than the interest rate for the FYs for your deposits.