PPF in minor child’s name can bring down lock-in from 15 years to 5 for her
PPF or Public Provident Fund is a popular long term, fixed income investment option under Section 80C. It is government backed, and comes with a EEE taxation benefit which means the capital, interest and maturity are tax free. A PPF account can also be opened in the name of a minor child. A parent or a guardian can open a PPF account in the name of the child with an initial amount of a minimum of ₹100. The minimum amount that has to be deposited in a year is ₹500 and maximum ₹1.5 lakh. Read on to know the benefits of opening a PPF account in name of your minor child.
PPF comes with a long lock-in period of 15 years from the end of the financial year in which the first deposit was made. So, the earlier you start, the sooner this lock-in will get over.
For an instance you start investing in PPF in name of your minor child at an age of 10, this PPF account will complete the 15-year lock-in period by the time your child is 25-26 years of age. And if your child does not need that money then, s/he can opt for an extension. PPF allows you to extend in blocks of five years. In the above example, if your child does not need the money at 25, s/he can extend it for another five years till 30 years of age. Again, if s/he doesn’t need the money at 30, another five year extension can be availed and so on.
So, we can say that for your child, the lock-in under PPF will come down from 15 years to five years at his or her own wish.
The extension can be availed with or without further deposits into the PPF. As per the current taxation laws, contributions made during the extension period will continue to be eligible for deduction under Section 80C of the Income Tax Act.
And if the extension is opted without any further contributions, the sum will continue to earn interest.
PPF currently offers an interest rate of 7.1%, compounded yearly. Maturity value can be retained without extension and without further deposits also.
Taxation benefits on minor’s PPF
There is no taxation benefit as such for the parent for investing in name of his or her minor child. If the guardian/parent already has a PPF account in his or her name, remember that the maximum amount that can be deposited in the guardian/parent account, including child’s account, is ₹1.5 lakh per year.
Remember that even if you invest in your minor child’s name, the income or returns will get clubbed with the income of the parent (the one who earns more that the spouse) for taxation. It will be considered income in the child’s hands only if he or she is above 18 years of age.
However, there is a small deduction available in case you invest the money in the name of your minor child. You can claim an exemption up to ₹1,500 per child every year, for a maximum of two children, under Section 10(32).
Emotional connect with your investments make you more disciplined
For some individuals, investing in name of child make them more disciplined. For some of you, buying products in the name of a child may help with goal-based investing and ensuring that you stay the course and don’t touch this money.