Investors investing in PPF in their children's names, be warned! One mistake could wipe out all your interest

Many parents dream of double tax benefits by opening a PPF account in their child's name, but the rules are different, and it's crucial to understand them. In this article, we will learn about the limits, interest, and tax rules related to minor PPF accounts.

When it comes to investments in India, it's impossible not to mention the Public Provident Fund (PPF). It's the first choice for every middle-class family for safe investment and tax saving. Parents often open a separate PPF account in their children's names for their future, education, or marriage. They think that by doing so, they can save more tax by depositing ₹1.5 lakh in their own name and another ₹1.5 lakh separately in their child's name, thus building a larger fund.

But wait! If you are also thinking the same, stop right there. Income tax and PPF rules say something else. In fact, this small misunderstanding can not only cost you your interest but also force you to deal with the tax department. So, let's understand the 'minor account' loophole of PPF that every parent needs to understand.

1. What is this 'one and a half lakh' calculation?

• The biggest attraction of PPF is the ₹1.5 lakh exemption under Section 80C of the Income Tax Act. But there's a catch that people often overlook.
• The total investment limit for an individual and their minor child's accounts combined is *only ₹1.5 lakh annually*.
• People think that if they deposit ₹1.5 lakh in their own account and another ₹1.5 lakh separately in their child's account, they will get interest on a total of ₹3 lakh.
• According to the rules, if you are the child's guardian, the total fund in both accounts should not exceed ₹1.5 lakh.

2. What happens if you deposit more than ₹1.5 lakh? Let's say you impulsively deposited ₹2.5 lakh by combining both accounts. Now, understand what will happen to you:

• Loss of interest: The bank or post office will not give you a single penny of interest on the extra ₹1 lakh you deposited. That amount will remain idle.
• Refund hassle: You will have to take back this extra amount without any profit, which may involve a lot of paperwork.
• Income tax shock: You will only be able to claim tax exemption on ₹1.5 lakh. You will not get any benefit on the remaining amount, and if you mistakenly claim exemption on the entire amount, you may receive a notice from the income tax department.

3. The complication of separate accounts for both

• Here's another interesting point: if the father opens the account as the child's guardian, the limit will be linked to the father's limit.
• If the mother becomes the child's guardian, that limit will be linked to the mother's ₹1.5 lakh limit.
• If both husband and wife earn separately, they can become guardians for one child each.
• But remember, there can only be one guardian for a child.
• It's not possible for both the father and the mother to deposit money in the same child's name.

4. What happens when the child turns 18?

• As soon as your child turns 18 (becomes a major), their PPF limit becomes separate from yours.
• After becoming an adult, the child can deposit their own ₹1.5 lakh separately, and you can deposit your ₹1.5 lakh separately.
• Only then will you get the benefit of 7.1% (current rate) on a total investment of ₹3 lakh.
• Keep these things in mind when opening a PPF minor account
• If you are opening an account in the child's name, you must take these precautions:

1- Who is the guardian: When filling out the PPF form, always clarify who is becoming the guardian.

2. Track the limit: Yes, every year in April, when depositing money, make sure that the total amount in your and your child's account does not exceed ₹1.5 lakh.

3. One child, one account: Only one PPF account can be opened in a child's name across the entire country. Opening accounts in two different banks is illegal.

Invest, but know the rules

Investing for your children is a great idea, but incomplete or insufficient knowledge of the rules can reduce your profits and create problems for you. PPF is a long-term game; a small mistake can prove very costly after 15 years. Therefore, if you want to invest more than ₹1.5 lakh, consider options like Mutual Funds (SIP) or Sukanya Samriddhi Yojana (if you have a daughter) in your child's name, where the limit restrictions are not as stringent as with PPF.

FAQs related to the news

1. Can I deposit a separate ₹1.5 lakh in my child's PPF account?

No, the combined annual limit for the parents' and minor child's PPF accounts is ₹1.5 lakh.

2. What are the disadvantages of depositing more than ₹1.5 lakh?

The excess amount will not earn interest or be eligible for tax exemption, and there may also be complications with refunds.

3. Who can be the guardian for a minor's PPF account?

Either the father or the mother can be the guardian; only one guardian is allowed for a child.

4. Do the rules change when the child turns 18?

Yes, after 18 years of age, the child's PPF limit becomes separate, and they can deposit ₹1.5 lakh themselves.

5. What should be kept in mind while opening a minor's PPF account?

Choose the guardian carefully, and track the annual limit.