PF Watch. The nuances of PPF investing for minors

The virtues of investing in the public provident fund (PPF) are well known. Tax-free interest and the instrument’s 15-year tenure mean that you can invest in PPF for achieving goals that are long term in nature. Investments in PPF can also be done in the name of your minor child toward meeting specific financial targets. But to make the most of this, you need to be clear about some key aspects before opening accounts in the names of minors, especially on the total investment limit and tax treatment.

As you must be aware, the total limit of investment in PPF is now ₹1.5 lakh. So, if you have a PPF account and wish to open another account in your minor child’s name, you can split this ₹1.5 lakh between the two accounts. The total amount that you can invest in both these accounts put together is only ₹1.5 lakh. Even though you may argue that you are claiming tax deduction only for the investments made in your name, you still cannot invest ₹1.5 lakh in each of these accounts. If you have more than one child, you can open an account in each child’s name. But the overall investment limit would still remain ₹1.5 lakh.

The PPF rules are clear and this aspect has been made clear multiple times by tax experts. Also, only one of the spouses can open an account in the name of their child or children, so each child can have only one PPF account.

If it is found that you have been investing more than ₹1.5 lakh totally, the bank or the post office where you have accounts would return the excess amount to you without paying any interest. This can seriously affect your financial calculations.

The other key aspect to be noted while investing in your children’s names is the tax angle once the PPF matures.

If your child is still under 18 by the time the PPF investment runs its course of 15 years (and you decide not to extend it further), the maturity proceeds would be handed over to you. While this is tax-free, if you proceed to park this amount in a fixed deposit (either in your name or the minor’s), the interest would be taxable in your hands.

So, from a tax angle, timing of the PPF investment to mature in line with the time your child turns 18 would be a suitable move for you. You can plan smartly to save taxes. Here’s how.

Once your child becomes a major, he/she would be eligible to operate the PPF account. So he/she can move the proceeds after the 15-year tenure and park the amount in a fixed deposit. The interest that your child would earn from this deposit would not be clubbed with your income and would be taxed in the child’s hands. So if he/she has no other source of income or has only a small income, your child would end up paying little or no taxes. The PPF proceeds, for example, can be split into four separate deposits maturing in four successive years to coincide with the payment of college fees of your child each year, or can be made into a single deposit to mature in time before your child’s marriage and so on.