The Public Provident Fund (PPF) account rules allow you to open an account for yourself and your minor child. And there are a few reasons why you i.e., as a parent, should open a PPF account for your child.
It is a common knowledge that a PPF account comes with a lock-in period of 15 years from the end of the financial year in which the account was opened. Therefore, if you open a PPF account for your kid at an early stage in his/her life, then by the time he starts working or becomes adult (i.e., turns 18 years of age), the account would have matured or be close to maturity.
However, do keep in mind that the total amount you can deposit in both the accounts (i.e., yours and your child’s) together should not exceed Rs 1.5 lakh in a financial year as per the current laws. This is also the maximum you can put into a single PPF account in a financial year and avail the section 80C tax benefit. This Section 80C tax benefit is available only if you opt for old tax regime while filing income tax return.
Let us look at how your child can benefit from you opening a PPF account for him.
Like we mentioned earlier, one of the benefits of the PPF account is its 15-year lock-in period. And once the child becomes a major, i.e., turns 18 years of age, the operation of account has to be handled by him/her, i.e., his/her signature will be required to withdraw or deposit money. Once your kid has become an adult and the account has completed its mandatory lock-in period of 15 years, he/she can decide whether to close the account or extend it.
The advantage that your kid will get – provided he/she decides to extend the PPF account – is that he/she will get to use a PPF account with a shorter lock-in period of 5 years as compared to the normal lock-in of 15 years that a normal investor would face on opening a new account.
This is beneficial because currently the PPF account has an EEE status, i.e., there is a tax break on the contribution, the interest is tax-exempt, and the amount withdrawn is also tax-exempt.
Consequently, PPF is considered a good investment avenue but due to its long lock-in period of 15 years, liquidity ends up being a problem. This drawback will be removed/reduced to a large extent for your child in the situation described above.
Extension of PPF account
Post the maturity of the PPF account, the account holder has two options – either to take the money and close the account or extend the account with or without contribution. As per the extension rules, the account can be extended ‘n’ number of times for a block of five years each.
This would mean that if your child wishes to continue with the existing account (post-maturity), the lock-in period of the account will be of five years. The child can choose whether he/she wishes to extend the account with contribution or without any future contributions.
If he wishes to continue the account without any future contribution, then the existing balances of the account will continue to earn interest as applicable. Remember according to current tax laws, the interest earned from the PPF account is exempted from tax.
On the other hand, if the account is extended with fresh deposits, then not only will it help him/her develop the habit of saving from the first job onwards, but he/she will also be eligible to claim the tax benefit under section 80C of the Income Tax Act on the fresh deposits.
Partial withdrawal facility
As per PPF rules, you are allowed to withdraw money from your PPF account from the 7th year onwards subject to certain terms and conditions. However, the withdrawal rules for an extended PPF account are different.
In the extension years of a PPF account, the account holder has an option to withdraw money once in a financial year. However, the maximum amount you can withdraw depends on whether you have extended the account with or without contribution.
If the PPF account is extended without any contribution, then one can withdraw any amount as limited by the balance available in the account. On the other hand, if the account is extended with fresh contribution, then during the five-year block, the withdrawal amount cannot exceed 60 per cent of the balance available at the start of extension period.
Thus, in case your child needs money for a short term study course, he has the option to withdraw the money as per his/her requirements while continuing to earn interest on the balance.
Things to remember
Post the maturity of the PPF account, remember to inform your account office where your PPF account is held before the end of one year from the maturity date, whether you wish to extend it with fresh deposits. If you do not do this the account will automatically be considered extended without any fresh contribution.