In one of earlier posts, we had pointed out how you can use your Public Provident Fund (PPF) investments to work as an excellent pension tool. PPF maturity and extension rules lend immense flexibility to the investors. However, a PPF account can be much more than a retirement savings and pension tool. Given the flexibility and tax benefits PPF investments enjoy, PPF is a great tool to save for your children’s education and marriage too. In this post, we discuss whether you should open a PPF account for your children and the associated deposit restrictions and benefits.
How can you open PPF account for your children?
A parent/guardian can open an account for his/her minor children. Either parent can open the account in the name of a child. However, both cannot open in the name of same child. You can open PPF account with a post office. Alternatively, you can open a PPF account with any prescribed public sector bank (SBI, Union Bank, PNB, IDBI etc) or a few private sector banks (ICICI Bank and Axis Bank). You can enjoy tax deduction for investment into PPF accounts (of self, spouse and children) up to a maximum of Rs 1.5 lacs per financial year under section 8C.
Maturity, Withdrawal and Extension rules for PPF Account
A PPF account matures in 15 years (after the end of financial year in which the account was opened). You can withdraw the entire amount after 15 years or extend your account in blocks of 5 years any number of times. The account can be extended with or without contribution.
Before the completion of initial maturity period of 15 years, premature withdrawals can be made after expiry of five years from the financial year in which the initial subscription was made i.e. if the account was opened in January 2005, you can do premature withdrawal from April 1, 2010. The maximum amount that can be withdrawn prematurely is capped at 50% of the PPF account balance (four years prior to year of withdrawal) or the PPF account balance in the preceding financial year, whichever is lower. In example given above (from April 1, 2010), you can withdraw 50% of balance amount as on March 31, 2007 or 50% of the balance amount as on March 31, 2010, whichever is lower. From April 1 2011, you can withdraw 50% of balance amount as on March 31, 2008 or 50% of the balance amount as on March 31, 2011, whichever is lower.
Withdrawals rules are different in the two extension cases. In case of extension with contribution, you can withdraw 60% of the PPF balance at the time of maturity in the next five years. In case of extension without contribution, there is no restriction on withdrawal. However, in either case, only one withdrawal is allowed per year. For detailed information about PPF extension and withdrawal rules, you can go to the following post. You can see withdrawal rules are more lenient after first maturity of 15 years.
How much can contribute to PPF account?
As per PPF rules, you can deposit a maximum of Rs 1.5 lacs per year in your account (including any account, where you are the guardian). Many people deposit more than Rs 1.5 lacs in a financial year. For example, they will deposit Rs 1.5 lacs each in their account and their minor child’s account. That takes the total deposit to Rs 3 lacs in a financial year. As per PPF rules, the total limit is Rs 1.5 lacs. Even bank officials are not clear about this. Till now, due to lack of technological advancement, tracking was not easily possible. However, with PAN becoming mandatory for investments, tracking may be possible. Since the limit is Rs 1.5 lacs and you make a declaration that you won’t deposit more than the limit in a financial year, you may not even get the interest on the excess deposit (You can check any PPF account opening form to verify the same. You can review Page 1 of ICICI Bank PPF account opening form). Though you may not be caught, you must be aware that you are going against the PPF rules if you deposit more than Rs 1.5 lacs.
We advise readers to limit contribution to their PPF account (and their children’s account) to Rs 1.5 lacs per financial year. However, there is a way through which you can contribute more to your PPF savings. Suppose you have two kids, you can act as guardian for one of the kids while your spouse can be guardian in your other kid’s PPF account. This way, you will be able to get Rs 3 lacs into PPF savings every year. Not just that, both you and your wife can enjoy tax deduction for Rs 1.5 lacs each.
If you can’t deposit more than Rs 1.5 lacs, why should you open a PPF account for your child?
You can argue this point. If there is no additional benefit (tax benefit or extra deposit in PPF), why should you open an account in the name of your child? Let’s discuss a few reasons.
You can earmark those investments (child’s PPF account) towards their education or marriage. Moreover, the utility of children’s PPF account does not end with completion of their education or marriage. You can extend the account with contribution and they can take over when they start earning. You can argue they can open an account themselves once they start earning. However, if they open an account after they start earning, their PPF account will offer very limited withdrawal options in the first 15 years. If you open their PPF account when they are quite young, they will have lesser restrictions in withdrawal and shorter lock-in periods for their investments in PPF account. Your children can use the same account for their retirement planning.
When your child grows, his/her investment will have a lock-in period of maximum 5 years. After the initial maturity period of 15 years, the account is renewed only in blocks of 5 years. Hence, any further deposits in the PPF account (after initial maturity of 15 years) will have a maximum lock-in of 5 years. Moreover, withdrawal rules are relatively lenient after the first maturity period of 15 years.
An additional point to note is that amount invested in PPF account in first year is locked for 15 years while the amount invested in the second year is only locked in for 14 years. Similarly, the amount deposited in the 13th and 14th years will be locked in for 3 and 2 years respectively. So, you can keep the account (your children’s account) alive in the initial years and you can increase your contribution towards the latter years. By doing so, your investment can earn tax-free interest in the latter years and with much smaller lock-in period.
If every member of your family has a PPF account (self, spouse and children), you get much more leeway in managing your PPF corpus. It is fair to assume not all accounts would have been opened at the same time. Hence, those accounts would mature at different times. If you foresee any medium term requirement for funds, you can increase allocation to PPF account which is closer to maturity (15/20/25 years and so on). At maturity, you can choose to withdraw or extend (with or without contribution) depending on your requirement. Hence, the more PPF accounts your family has, the better it is. Please note any individual can open just one PPF account under his/her name.
PPF is one of the best and most tax-efficient debt products available to investors. We have shown you a few ways to leverage PPF investments to suit your financial needs better. However, withdrawing from the PPF just because the rules let you do so is not a wise decision. Investment discipline is very important. If you are saving for your retirement through PPF, then regular withdrawals from the account may not leave you with enough funds at the time of retirement.
We also do not mean that your entire savings/investment for children education and marriage should be in your PPF account. Diversify your investments properly. Investors must keep in mind returns on PPF account may not be able to beat inflation over the long term. Keep a simple rule in mind: For long term goals, the portfolio should be equity heavy and for short term goals, the portfolio should be debt heavy. However, a PPF account can play an important role in meeting both long and short term financial goals. Depending upon the nature of the goal, the allocation and usage will change. If you use the PPF account in a smart way, you can give your children head start in financial planning. So don’t wait for too long, go ahead and open PPF account for your children.
Deepesh is a SEBI registered Investment Adviser and Founder, www.PersonalFinancePlan.in