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Public Provident Fund (PPF) is a safe investment option with around 8% returns that are fully exempted from Income Tax. Public Provident Fund is suggested as an ideal vehicle for long term investment and many use it as an important saving tool for children. Rules of operating minor’s PPF account are similar to the regular account. One can open PPF account for a minor but One has to know about the amount that one can put into the PPF account of minor and what to do when the child becomes major.

PPF account for Minor

Rules of operating minor’s PPF account are similar to the regular account. The interest rate of PPF are declared every quarter by the Govt. Its features are given below, our article Understanding Public Provident Fund, PPF explains it in detail.

Either father or mother can open a PPF account on behalf of his / her minor child, but both cannot open the account for same child.

One can put a maximum of 1.5 lakh in one’s own account and that of Minor together. There was confusion earlier but in revised PPF rules in Dec 2019, it has been made clear, so now there is no ambiguity. You can read new rules here

Once the child becomes a major, i.e., turns 18 years of age, the operation of account has to be handled by him/her. He will submit a revised application form for opening the account. His signature on the application form will be attested by the guardian who opened the account of the minor or by a respectable person is known to the Accounts Office

Loan on minor’s PPF account:  You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 2009-10, the first loan can be taken during the financial year 2011-12. In case of an account opened on behalf of a minor or a person of unsound mind, the guardian may apply for the loan for the benefit of the minor by submitting a certificate to the accounts office

Withdrawal from minor’s PPF account: You can make withdrawals from the sixth year i.e after the expiry of 5 years full financial years from the end of the year in which your initial subscription was made In case of an account opened on behalf of a minor the guardian may apply for the withdrawal for the benefit of the minor or a person of unsound mind by submitting the certificate to the accounts office.

Extension of Minor’s PPF account: An account opened on behalf of a minor may be extended at the request of the guardian after 15 years of opening account.

The image below shows how one can have 1 crore in PPF in 23 years for someone who started in 2016

How can one get 1 crore by saving in PPF account

How can one get 1 crore by saving in PPF account

Why open PPF account for Children?

Due to the advantages of PPF people invest in Public Provident Fund and they also want to invest for their spouse/wife and their minor children.  They don’t want to claim deduction under 80C but want a safe investment option. As interest earned in PPF is completely exempt from tax under Section 10 (11) of the Income Tax Act hence even though Clubbing of income comes into play it doesn’t push your tax liability. PPF account for wife is allowed, also for the minor child in addition to self. BUT there is a lot of confusion on the amount that one can put in PPF account for minor in addition to self. But with the new rule, the confusion has been put to rest.

Limit on Investment in PPF account for minor child and Self

There have been cases where people have opened the PPF account in their name and name of their minor child and have been depositing in both the accounts (upto the limit)  and earned interest too. In Dec 2019, new Rules of PPF 2019, clarified that One can put a maximum of 1.5 lakhs in one’s own account and that of Minor together. 

Can I deposit 1.5 lakh each in my PPF account and my minor kid PPF account – so together 3 lakh deposit in the PPF. I would be claiming tax exemption under 80C only for 1.5 lakh for myself? Is this possible?

In the new rules for PPF published on 12 Dec 2019, it has been clearly stated that

4. Limits of subscription.-(1) A deposit which shall not be less than five hundred rupees and not more than one lakh fifty thousand rupees in multiple of fifty rupees may be made in an account in a year.

(2) Maximum limit of one lakh fifty thousand rupees as specified in sub-paragraph (1) by an individual shall be inclusive of the deposits made in his own account and in the account opened on behalf of the minor.

The question that comes up is “But what about the investment done, bank or post office did not stop me from doing so and even interest was credited?” What is the fate of money deposited till now?  

In fact, people have tried to verify it from the bank officials also, as shown below from Jagoinvestor forum Total PPF investment limit including Spouse and Minor account

 I met the manager of the branch of the bank (State Bank of India) where I have all these three accounts. I narrated the whole scenario. He does not see any problem with the situation. I am really confused as to continue this mode of the financial plan or to change it in the light of your clarification regarding the total PPF investment limit.

What happens to PPF account when minor becomes major?

Once the child becomes a major, i.e., turns 18 years of age, the operation of account has to be handled by him/her. He will submit a revised application form for opening the account. His signature on the application form will be attested by the guardian who opened the account of the minor or by a respectable person is known to the Accounts Office.  Along with the documents required and the signature of the depositor who has become major shall be attested on the revised application form by the guardian who opened the account.

Our article Understanding PPF account has all the forms.

Loan on minor’s PPF account

You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 2009-10, the first loan can be taken during the financial year 2011-12. Our article How to take Loan from PPF explains the process in detail with Loan Calculator.

In case of an account opened on behalf of a minor, the guardian may apply for the loan for the benefit of the minor or the person of unsound mind by submitting the following certificate to the accounts office, namely:-

Certified that the amount sought to be withdrawn is required for the use and welfare of Shri/Smt./Master/ Kumari………. who is a minor/ a person of unsound mind/a person incapable of operating his account due to physical infirmity and is alive on this……the day of…………..(month), ……….(year).”.

Withdrawal from minor’s PPF account

You can make withdrawals from the sixth year i.e after the expiry of 5 years full financial years from the end of the year in which your initial subscription was made. This means that from the day you open your account, you will need to complete 6 full financial years before you can make any withdrawal.

You are allowed to withdraw 50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.

Our article PPF Partial Withdrawals explains the partial withdrawal from PPF.

In case of an account opened on behalf of a minor, the guardian may apply for the withdrawal for the benefit of the minor or a person of unsound mind by submitting the following certificate to the accounts office, namely:-

“Certified that the amount sought to be withdrawn is required for the use and welfare of Shri/Smt./Master/ Kumari………. who is a minor/ a person of unsound mind/ a person incapable of operating his account due to physical infirmity and is alive on this……the day of…………..(month), ……….(year).”

Extension of Minor’s PPF account with deposit

Provided that an account opened on behalf of a minor may be extended at the request of the guardian with or without deposit.

Overview of PPF

Public Provident Fund (PPF) is a safe investment option with around 8% returns that are fully exempted from Income Tax. Public Provident Fund is suggested as an ideal vehicle for long term investment in debt category, an important retirement saving tool for individuals. Its features are given below, our article Understanding Public Provident Fund, PPF explains it in detail.

  • You need to deposit a minimum of Rs. 500 per year in a PPF account.
  • Maximum amount  which you can deposit in a PPF account is Rs. 150,000. (Earlier limit was Rs 70,000 it was increased to 1 lakh from 1.12.2011 then increased to 1.5 lakh)
  • You can deposit lump sum or multiple installments in multiples of 50. However, the maximum number of installments in a year can not be more than 12.(removed on 12 Dec 2019)
  • The duration for the investment is 15 years. However, the effective period works out to 16 years i.e., the year of opening the account and adding 15 years to it.
  • PPF works on a financial year basis (April 1st – March 31st) and interest is credited only at the end of financial year.
  • PPF interest is calculated monthly on the lowest balance between the end of the 5th day and last day of month, however the total interest in the year is added back to PPF only at the year-end
  • The interest earned in PPF remains fixed for one year and is no longer guaranteed forever. It is actually benchmarked to the 10-year government bond yield and will be0.25% higher than the average government bond yield. 
  • The amount you invest is eligible for deduction under Section 80C. Remember f benefits expenses like life insurance premiums, children’s school fees qualify under Section 80C as deductions in addition to other approved investment mediums like ELSS, 5 year FD’s, NSC etc.
  • Interest earned on the investment is completely exempt from tax under Section 10 (11) of the Income Tax Act.
  • You cannot open a joint account with another individual. The account can only be opened in one person’s name.

It is difficult to find fixed-income instruments at the same low-risk level that can yield you comparable returns!

Investing in the name of Wife and Children – Tax Implications

But if one invests in the name of Wife and/or Children clubbing of income comes into play. Clubbing provision under Section 60-64 of Income Tax Act is meant to check tax evasion. Our article Clubbing of Income explains it in detail. Economic Times Seven ways to earn tax-free income also explains it.

For Wife : For wife clubbing happens only at the first level of income. If this money is reinvested and earns an income, it will be treated as your wife’s, not yours and then, the income will not be clubbed. You can gift money to your wife and then get her to invest in any of the several tax-free investment options such as PPF. The earning will be clubbed with your income, but since these investment options are tax-free, it won’t push up your tax liability. There’s another way to escape clubbing. Instead of gifting, give her a loan.

For Minor Child(Child less than 18): if a parent invests in a minor child’s name, the income is clubbed with that of the parent who earns more. In some cases, a minor child may have a personal income, such as a cash prize in a competition or payments for commercials and events. However, this is rare and mostly it’s the parent who invests on behalf of the child. There is a Rs 1,500 exemption per child per year for the income earned by investments made in the name of the children.You can avail of this for a maximum of two children. This means you can safely invest Rs 15,000 in a fixed deposit in your child’s name. If you have two children, that’s Rs 30,000 earning tax-free income every year. Opt for the annual payout option because the cumulative option will push up the earning beyond the tax-free limit in a couple of years as the compounding effect comes into play. Please Note: Either father or mother can open a PPF account on behalf of his / her minor child, but both cannot open the account for same child.

For Major Child (Child more than 18): After a person turns 18, (s)he is treated as a separate individual for tax purposes. This means his(her) earnings are no longer clubbed with his parent’s income and (s)he enjoys the same exemptions and deductions as any other adult taxpayer. Gifting money to a child above 18 and then investing it for taxfree gains is a perfectly legal strategy.

It’s clear one can open a PPF account for minor child and self. But now maximum amount of contribution in PPF by an individual shall be inclusive of the deposits made in his own account and in the account opened on behalf of the minor.

Note: If the account is opened in the name of the minor and the minor attains majority before the maturity of the account, the ex-minor will himself continue the account thereafter. He will submit a revised application form for opening the account to the Accounts Office. His signature on the application form will be attested by the guardian who opened the account of the minor or by a respectable person is known to the Accounts Office. Ref: PPF rules

Thanks to our readers especially Arv Raj for raising the question, CA Karan Batra for quick responses and my friends Nick, Gopi, Sangeeta, Linnet, Soumya for a lively discussion on it (and on can mutual fund create wealth?)

Related Articles :

Have you opened Public Provident Fund (PPF) account for self and minor? Do you put more than 1 lakh in PPF account of minor and child? How do you interpret the law? Have your PPF account for minor completed 15 years? Did your PPF account for minor face any problem on maturity?

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