Personal Loan, Credit Card Loan vs. PPF Loan & Partial withdrawal facility from PPF Account

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Personal Loan, Credit Card Loan vs. PPF Loan & Partial withdrawal facility from PPF Account

“Money saved is money earned”.

The easy availability of funds or Loan on phone sometimes influences the individuals that the cost of fund & alternate option is ignored. Personal loan or credit card loan is one such loan which is very easily, speedily, conveniently available to the individual citizens. However, it is costlier as compared to other options as it is offered without any mortgage & collateral with flexibility as to its usages. Interest is normally charged by the financial institution ranges from 13% to 30% with a processing fee in the range of 1% to 3%.

Suitable comparison of loan options can be a powerful tool in managing personal finances. One such alternate option could be “Loan against PPF” or “Partial withdrawal facility from PPF A/c”. Let us compare personal loan/credit loan vis a vis PPF Loan-

  1. Loan Amount:
    Eligibility of personal loan is dependent on the income slab and repayment history of the individuals whereas in case ofLoans against PPF, it is purely  dependent on the amount of investment done earlier.
    Rule 10 of the PPF Scheme incorporates the schema of loan facility to the account holder. Loan facility is available from the 3rd financial year.
    One can borrow up to 25% balance (inclusive of interest) at the end of the 2nd year of the PPF account prior to the loanapplication year. For example, for availing loan in current FY 2018-19, the loan amount will depend on the PPF balance at the end of FY 2016-17 i.e., on 31.03.2017.  For loan, application has to be done in Form D.  Loan amount has to be repaid in one or more monthly installment within a period of 36 months. However, Loan facility is not available after completion of 5 years wherein rule 9 allows partial withdrawals from the account without losing any tax benefit.Partial Withdrawal (in Form C) is permitted at any time after the expiry of 5 years from the end of the year in which the initial subscription was made. Maximum withdrawals permissible is up to 50% of the amount standing (a) at the end of the fourth year immediately preceding the year of withdrawal or (b) at the end of preceding year, whichever is lower. This 50% amount would further be reduced by the amount of loan, if any, availed & remained unpaid by the depositor. In case the PPF account is extended for a further period of 5 years by the depositor after a completion of 15 years period, then the withdrawals is permissible up to 60% of the balance at his credit at the end of 15 years period.
  2. Interest Rates:
    Personal loan is often negotiable for individuals having a strong income base & established credit history. Interest for personal loan ranges from 13% to 30% per annum. PPF loan have rate of interest which will always be 2% more than the current rate offered on PPF balance. There is no scope of scope of negotiation as far as Loan against PPF is concerned. It is undoubtedly much lower as compared to the cost of personal loan provided it is repaid within 3 years. If loan amount & repayment suffices, PPF Loan is much cheaper as compared to personal loan. There is no scope of scope of negotiation as far as Loan against PPF is concerned.
  3. Borrowing more than once a year:
    There is a ceiling on the number of occasion loan can be taken against PPF A/c which is not so in case of personal loan. Loanagainst PPF can be taken only once in a year. Second loan in a financial year is not allowed even if the previous loan has been repaid. This is not so with the personal loans who are ever ready with their “Top Up” facility for additional loan.
  4. Loan Tenure:
    Repayment tenure of a personal loan is mutually decided by the lender & borrower with a specific repayment track at the time of availing the loan.
    However Loan against PPF is necessarily required to be repaid within 36 months of its availment. If the PPF loan is not repaid within 36 months from the first day of the month following the month in which then loan is sanctioned then interest rate increases by 4% from the prevailing rate charged in the account.

People often complaint that PPF A/c lack liquidity due to higher lock in period of 15 years. This is not fully true. PPF account can be closed even before completion of 15 years period in certain special cases. (i) Amount is required for the treatment of serious ailments or life threatening diseases of the account holder, spouse or dependent children or parents, on production of supporting documents from competent medical authority. (ii) Amount is required for higher education of the account holder or the minor account holder, on production of documents and fee bills in confirmation of admission in a recognized institute of higher education in India or abroad. Above premature closure of account is permissible with 1% reduction in interest rate.

[Readers may forward their feedback & queries at nareshjakhotia@gmail.comOther articles & response to queries are available at www.theTAXtalk.com ]

 


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