For a parent, including their child’s future requirements, constituents and important and major part of financial planning. The right investment scheme can help secure money for the future big expenses in your children’s life — education, healthcare, hobbies, marriage, and other aspirations.
Here, the public provident fund is a good savings-cum-investment instrument to consider. Launched in 1986, PPF is a government-backed savings scheme with guaranteed tax-exemption on investment, the maturity amount, and the interest earned (aka EEE benefit). Further, at a fixed interest rate of 7.1% this quarter, PPF is among the safest investment options in India.
You can open one account per person with any post office or public bank and some private banks across India, with a minimum deposit of ₹100-500 per month. For children or minor applicants, a parent or guardian can open a joint PPF account which can be converted once the account holder turns 18 years old.
Public Provident Fund: Key highlights of PPF account
To open a PPF account, you will need to fill and submit the application to your preferred bank or closest post office along with KYC documents, including Aadhaar Card copy, proof of residence, and a passport-size photo. You can also open a PPF account directly through your bank via online or mobile banking, with KYC.
In order to convert the account from minor to major status once your child reaches 18 years of age, you must submit a revised application form with the necessary documents to the bank or post office.
Notably, only one account is permitted per person. The original term of the account is for 15 years, after which it can be extended in blocks of five years indefinitely. During extensions, you can choose to not add further contributions.
Notably, each extension is not automatic, and you will need to submit a request to the bank or post office to continue the account for another five years at end of term.
You can take a loan up to 25% of the PPF account balance, after one year of the account being active, according to a Clear Tax report. A second loan is permitted only after the first is fully repaid. There is a 1% if the amount is repaid within 36 months; or is increased to 6% interest thereafter, it added.
| Factors | Public Provident Fund (PPF) |
|---|---|
| Tenure | 15 years, plus 5 years extensions |
| Risk | Risk-free, guaranteed return as per fixed interest rate |
| Tax saving | Under Section 80C, up to ₹1.5 lakh |
| Opening deposit | ₹100-500 |
| Access | All public banks and post offices, some private banks |
| Loan collateral | Accepted, after 1 year (up to 25% of balance) |
| Interest rate | 7.1% fixed (reviewed each quarter) |
| Who can operate | Individuals and joint accounts including minors |
| Withdrawals | Partial withdrawal after 5 years, full after 15 years |
| Sources: Clear Tax | |
Investing in your child’s PPF: Understand ₹1.5 lakh/year limit
There is a common misunderstanding among investors that each parent can invest ₹1.5 lakh each, in their child/children’s PPF account. However, this raises the annual contribution to ₹3 lakh, way above the tax-free ₹1.5 lakh cap.
According to PPF rules, the total tax-free contribution is ₹1.5 lakh per financial year, and includes deposits made to own and children’s account combined. Thus, a minor’s PPF account cannot receive more than ₹1.5 lakh in total contributions in a year, regardless of whether one or both parents / multiple guardians contribute. Below is an illustration:
| Scenario | Father’s input | Mother’s input | PPF total | Tax free |
|---|---|---|---|---|
| Both parents invest ₹1.5 lakh each in child’s account | ₹1.5 lakh | ₹1.5 lakh | ₹3 lakh | No |
| Both parents equally divide contribution within limit | ₹75,000 | ₹75,000 | ₹1.5 lakh | Yes |
| Father invests in own + child’s account | ₹1 lakh (own) + ₹50,000 (child) | ₹1.5 lakh (own) | ₹50,000 | Yes |
| Total exceeds contribution limit | ₹1 lakh | ₹1 lakh | ₹2 lakh | No |
Contributing to child’s PPF: Tax impact
- Contributions made to a child’s PPF account as treated as gift under income tax laws. Thus, the interest earned is credited to the child’s account but may be clubbed with the income of the higher-earning parent as per tax rules.
- Still, as the PPF interest is completely tax-free, this does not result in any additional tax burden.
- In conclusion, even if both parents contribute, the total deposit in a child’s PPF account cannot exceed ₹1.5 lakh in a given financial year. Acknowledging and understanding this rule can help in avoiding excess deposits and ensure proper tax compliance.
- Before making any investments for your children, it is prudent to sit down with a certified financial advisor and plan your child’s future education, health, and overall well-being diligently.
- For example, when it comes to your daughter, the Sukanya Samriddhi Yojana may be a better option. There are only other investment options such as fixed deposits and mutual funds, so having expert opinion based on your financial goals is important.
What are the PPF rules of withdrawal?
There are three basic kinds of PPF withdrawal rules: Partial withdrawal, premature closure, and withdrawal after maturity. These are explained as follows:
- For minor accounts, the parents or guardians can make partial withdrawals after submitting a declaration that the amount withdrawn is required for the minor’s use.
- Partially withdrawal up to 50% of the balance with no penalty is allowed after five years of the account being active.
- Full withdrawal is allowed upon account maturity, with no penalty and tax-free status.
- There is also a feature to prematurely close a PPF account with withdrawal after 1% reduction in interest rate after five years of the account being active. Notably, this is only allowed in certain cases, such as a change in residency status, higher education fees, or medical emergencies.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
