I had a discussion with a friend a couple of weeks back about investment in PPF account. We discussed how investment in PPF account was capped at Rs 1.5 lacs per account.
If you are married, you could invest Rs 3 lacs per annum (Rs 1.5 lacs in your account and Rs 1.5 lacs in your spouse’s account). You can’t breach the limit of Rs 3 lacs even if you have kids since the contribution to minor children’s PPF account is also counted as your contribution.
He pointed out that there was a way where you and your spouse could invest more than Rs 3 lacs per financial year and explained how to do it. To be honest, I had not given this trick much thought before.
Let’s see how it works.
What is a restriction as per PPF Act?
- You cannot invest more than Rs 1.5 lacs per financial year in PPF account.
- For the PPF account opened in the name of a minor, there has to be a guardian.
- Guardian has to be either mother or father. If the parents are not alive or are not in a capacity to act, a legal guardian can also act as guardian in minor’s PPF account.
- Quite clearly, once a minor turns major, there will be no guardian in the account.
- If you have opened a PPF account for your kids (where you act as guardian) or any other PPF account where you are a guardian (legal guardian), you cannot invest more than Rs 1.5 lacs in all the accounts combined (your account and those accounts where you are guardian).
- The excess amount will not earn any interest.
Let’s assume you open PPF account for yourself and your kid. You act as guardian in the account. If you put Rs 1 lac in your kid’s PPF account, you cannot put more than Rs 50,000 in own account in the same financial year.
What is NOT a restriction as per PPF Act?
- You can contribute to PPF account of your spouse.
- You can contribute to PPF account of your minor child where you are a guardian.
- You can contribute to PPF account of your minor child, where you are NOT a guardian. To put it another way, you can also contribute to PPF account of your child, where your spouse is the guardian.
- You can contribute to PPF account of your major child.
How do you invest more than Rs 3 lacs?
Point (3) in the previous section is quite interesting.
The restriction of Rs 1.5 lacs on investment is only for your own account and those accounts where you are the guardian.
What about investing in PPF account of kids where you are not a guardian (in PPF account)? Apparently, this is no cap except that no PPF account can get contribution worth more than Rs 1.5 lacs in a year.
Let’s consider an example. There are 4 members in the family.
Husband (H), Wife (W), Son (S) and Daughter (D).
S and D are minors.
Suppose all have PPF accounts.
H is the guardian in S’s PPF account while W acts as guardian in D’s PPF account.
Consider following scenario.
- H makes a contribution of Rs 1.5 lacs to his PPF account.
- W makes a contribution of Rs 1.5 lacs to her PPF account.
- H makes a contribution of Rs 1.5 lacs to S’s PPF account.
- W makes a contribution of Rs 1.5 lacs to D’s PPF account.
To put it another way,
H’s PPF Account: Rs 1.5 lacs own investment
W’s PPF Account: Rs 1.5 lacs own investment
S’s PPF Account (H is guardian): Rs 1.5 lacs by W
D’s PPF Account (W is guardian): Rs 1.5 lacs by H
If you see, none of the restrictions imposed by the PPF Act have been violated.
The restrictions were:
- H cannot contribute more than Rs 1.5 lacs to his and S’s account i.e. H’s contribution to H+S cannot exceed Rs 1.5 lacs. H has not contributed anything to S’s PPF account. Therefore, his total investment in his and S’s account is only Rs 1.5 lacs. W has contributed to S’s PPF account. So, we are safe.
- W cannot contribute more than Rs 1.5 lacs to her and D’s account. W has not contributed anything to D’s PPF account. We are safe here too.
Therefore, Rs 6 lacs have gone to the PPF accounts of the family but there is no violation of PPF Act.
This is just an illustration. We could have had many alternate scenarios. In fact, if H and W had more than 2 kids, they could have invested even more.
What does Income Tax Act say about this?
The cap of Rs 1.5 lacs on investment in PPF Account comes from the PPF Act.
Income Tax Act is not bothered.
Section 80C of the Income Tax Act merely mentions that you get tax benefit for contribution up to Rs 1.5 lacs in your PPF account or PPF accounts of your spouse and kids (both major and minor). You do not even need to be guardian in PPF account of your kid (your spouse can be the guardian) to avail tax benefits. That’s it.
Therefore, as per Income Tax Act, it does not matter whether you invest Rs 5,000, Rs 50,000 or Rs 5 lacs in PPF. You can invest any amount. There will be no violation of Income Tax Act. Just that the tax benefit is capped at Rs 1.5 lacs per person per financial year.
What do I think of this?
Such investments may be allowed as per law but does not seem right in spirit. The ceiling on PPF investments is because PPF falls in EEE product basket and gets slightly favorable debt returns too.
Therefore, it is a burden on Government if you invest more in PPF (it loses out on taxes).
For instance, continuing with the same example,
H’s PPF Account: Rs 1.5 lacs by W
W’s PPF Account: Rs 1.5 lacs by H
S’s PPF Account (H is guardian): Rs 1.5 lacs by H
D’s PPF Account (W is guardian): Rs 1.5 lacs by W
Even this is allowed. However, you can see H and W are investing in each other’s account (and not own accounts).
They could have invested in own accounts but didn’t just to maximize family investments in PPF.
This does not look RIGHT, does it?
Something does not look right can be challenged by the authorities at any point of time. It is all about interpretation.
Well, at the same time, there are many provisions on Income Tax Act that do not look RIGHT in spirit.
What should you do?
Well, you need to be married and have kids to be able to pull off this kind of jugglery.
First, you need to see if and how much you need to invest in PPF. If you are already investing in EPF, the need for heavy investments in PPF may automatically go down.
PPF is a long term debt product. So, if you are investing for the long term, do consider exposure to growth assets such as equities.
You do NOT want to be in a position where your inclination towards PPF and presence of such loop holes in the system crowds out other investments.
Even Rs 3 lacs per annum is a lot of money. You need to see if increasing it to Rs 4.5 lacs (single kid) or Rs 6 lacs (two kids) or even more fits with your overall planning. If your love for PPF has ensured that it is your only big investment, you need to rethink your strategy.
Diversify your investments across asset classes and within asset class too.
Moreover, as I mentioned before, it is NOT right in spirit. Such investments can be challenged. Therefore, personally, I will not breach the limit of Rs 3 lacs per year (Rs 1.5 lacs each for self and spouse) even if I had financial muscle to exceed the limit.
Therefore, according to me, this post is more about theory than practical application.