PPF: Those investing in PPF in their children's names should be cautious! One mistake could wipe out all your interest earnings..

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 savings. Parents often open a separate PPF account in their child's name for their future, education, or marriage. They believe that by doing so, they can save more on taxes and build a larger fund by depositing ₹1.5 lakh in their own name and another ₹1.5 lakh in their child's name.

But hold on! If you're thinking the same, stop right there. Income tax and PPF rules say something different. 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 in PPF that every parent needs to know.

1. What is this '₹1.5 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 *₹1.5 lakh per year*.

People think that by depositing ₹1.5 lakh in their own account and another ₹1.5 lakh in their child's account, they will earn 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, in your enthusiasm, you deposited a total of ₹2.5 lakh in both accounts. Now, do you 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. The hassle of refunds: You will have to get this extra amount back 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. There will be no 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 account.

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 each become the guardian of one child.

But remember, there can only be one guardian for one child.
Both the father and the mother can't deposit money in the same child's account.

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.

Things to keep 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 clearly specify who is becoming the guardian.

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

3- One child, one account: Only one PPF account can be opened in the name of one child across the entire country. Yes, 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 even create problems for you. PPF is a long-term game, and a small mistake can prove very costly after 15 years. So, 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), where the limit is not as restrictive as with PPF.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.