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Sunday, April 20, 2014

Withdrawal and Loans from your PPF Account

Public Provident Fund (PPF) is a great wealth building tool for risk-averse investors and should be opened and continued till maturity by one and all. But, can you withdraw from PPF? If yes, when and how much? Can you take a temporary loan? Let us understand.
Why this post?
A lot of freedom seekers seem to be unclear of how much money can be withdrawn from their PPF account in case of emergencies. Hence, i thought of clarifying all of them via this post.

Withdrawal Terms and Conditions
There is a lock-in period of 15 years and the money can be withdrawn in whole after its maturity period. However, pre mature withdrawals can be made from the end of the sixth financial year from when the PPF commenced. 
The maximum amount that can be withdrawn pre maturely is equal to 50% of the amount that stood in the account at the end of 4th year preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
Example
If the account was opened in 2005-06, and first withdrawal can be made during 2011-12. 
The amount of withdrawal will be the lower of:
a. 50% of the balance as on March 31, 2008 (Financial Year 2007-08) (4th year

preceding the year in which the amount is withdrawn
b. 50% of the balance as on March 31, 2011 (Financial Year 2010-11) (end of the preceding year)
Note: If the PPF account is extended beyond the initial 15 years (it can be done in blocks of 5 years), the amount allowed to be withdrawn is 60% of your balance at the beginning of the extended period)

While withdrawing money is definitely an option, but in case you are not able to satisfy the withdrawal terms and conditions, then you have another option to fall back on. You can also opt for a loan from PPF account.

Facility of Loans

In case of emergency situations before the 7th year, you can take loans from your PPF account. You can take loans between 3rd and 6th year of opening the PPF account.
The maximum loan amount available will be equal to 25% of the balance at the end of the 2nd immediately preceding year.
Example
In our example, if loan is sought in 2010-11, the maximum amount of loan available would be 25% of the balance as on March 31, 2009.

The rate of interest on the loan is usually 2% over and above the rate of interest you receive in the PPF account. This loan has to be repaid within a period of 24 months.
Once you repay a loan, another loan can be taken as long as you are within the 3rd and the 6th year of opening the account.
After 15 years of maturity, full PPF amount can be withdrawn and all is tax free, including the interest amount as well.

Please note that this PPF withdrawal facility should be used judiciously. PPF is meant for long term savings, and utmost care should be exercised while withdrawing money from it. You should withdraw only for emergencies, like a medical emergency. Funds should not be withdrawn for funding purposes, like for buying a car or a house.


The right understanding can save money for you from getting locked in avenues which do not give you enough returns. Money invested well is money earned. All the best.


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Cheers

Manoj Arora
Freedom can buy you what money cannot !!

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