In December last year, the government made some changes to the Public Provident Fund (PPF). One of them is the interest rate of loans on PPF accounts. In fact, the loan facility is also available on the PPF account. After the new change, the interest rate on loans taken like this will now be 1 percent. Earlier it was available at 2 percent. This rule will apply to loans taken after December 12. This rate of interest really makes it much cheaper than other types of loans. However, experts warn about taking a loan on a PPF account. There are many reasons for this. The annual interest rate of loans taken on the PPF account is 1 percent. However, it has to be kept in mind that the tax exemption is lost after taking the loan. The reason is that no interest is paid unless the original amount including interest is refunded.
Experts say that there is no interest on the amount of loan that is taken. When there is no interest, there will be no tax exemption. Tax exemption will not benefit unless the loan amount and interest are exhausted. PPF is very popular because of its tax benefit. PPF has been granted exempt-exempt-exempt(EEE) status. That means tax exemption is available at the time of investment. There is no tax on the amount of money and even during withdrawals. PPF does not attract tax on both investment and return. Therefore, it is considered a good option for investment. PPF is used to make money in the long term. But, before taking a loan, you should remember that the loan amount, including interest, does not get the facility of tax-free returns until the loan amount is exhausted.
There is another reason for not taking a loan on PPF. In fact, it has a loan facility from the third year to the seventh year after the PPF account is opened. Partial withdrawal facility is available from the seventh year. The loan amount can be 25 percent of the deposit in two years. If you have opened a PPF account in the financial year 2018-19, the loan facility will start from fiscal year 2020-21. Loans can be availed by FY 2023-24. If there is a lot of compulsion, you should take a short term loan on PPF. The loan amount should be minimal. The reason is that after taking the loan, interest on interest does not get the benefit of compounding returns.
According to the rule, if an investor is investing Rs 1.5 lakh every year, and opened a PPF account in 2018-19 and applied for a loan in 2022-23, then he can get a loan up to Rs 1,31,230. The closing balance for 2022-23 will be taken into account, which is 5,24,918. Loans on PPF account are definitely available at an interest rate of one percent annually. However, the effective rate of such a loan is 1 percent of the current rate of PPF account. This is because there is no interest on the loan amount taken. However, the rate of interest is lower than the personal loan. Still, it is not advisable to take such a loan.
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