Even in this age of financial engineering and exotic financial products, the Public Provident Fund account - a long-term small savings scheme of the Central Government (framed under the PPF Act of 1968) - remains one of the most popular investment avenues.
But are you aware that a PPF account can also be opened in a minor's name, which can help plan for his or her financial goals?
Yes, you read that right.
Every parent aspires to provide the best to their child - be it his/her higher education, a good lifestyle, and a grand wedding, yet within means. That said, as you know, all this requires making sensible and systematic savings and investments early on in life so that a respectable corpus can be built.
The minor's PPF account enables you to do that.
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Here are the rules to open a minor's PPF Account
- It can be opened in the child's name by a parent or a legal guardian. Grandparents, however, cannot directly open it for their grandchildren if the child's parents are alive.
- Only one parent or guardian can open a PPF account in their child's name
- The parent or guardian must be a resident of India
- Only one PPF account per minor is allowed
There is no minimum age limit to open a Public Provident Fund (PPF) account for a minor, allowing accounts to be opened from birth.
Where can the minor's PPF Account be opened?
This account can be opened with authorised banks (such as State Bank of India, HDFC Bank, ICICI Bank, Axis Bank) or Post Office using Form A/Form 1.
Typically, the documents required are a minor's birth certificate, Aadhaar card, PAN card of the parent or legal guardian, and photographs.
It is also recommended to register a nominee when opening the account.
The Minimum and Maximum Investment
The minimum investment to open the account is Rs 100 (by way of account opening cheque), while to keep it active, the minimum contribution that needs to be made is Rs 500 and a maximum of Rs 1.5 lakh per financial year, either as a lump sum or in up to 12 instalments.
Note that the cap of Rs 1.50 lakh per financial year applies to self and minor's PPF accounts.
If you deposit more than Rs 1.5 lakh in a PPF account within a financial year, keep in mind, the excess amount will not earn any interest and won't qualify for tax deductions under Section 80C of the Income Tax Act. In other words, there is no benefit of investing in excess.
Hence, you need to think through well how much to allocate to the self and minor's PPF account to reap the maximum benefit.
A Case Study
Say, your priority is to make a contribution to plan for your minor child's higher education needs 15 years down the line.
In such a case, a higher sum of the investible surplus needs to go to the minor's PPF account, whereby it ensures the amount is sufficient to keep up with inflation and helps you achieve your financial goals. As per the prevailing rate, the PPF account earns interest at 7.1% p.a., compounded annually.
For example, if the minor's age today is 3 years and you need Rs 35 lakh after 15 years, i.e. when he/she turns 18 years, assuming the current interest rate of 7.1%, you will need to make a monthly contribution of approximately Rs 10,882 to the minor's PPF account.
| Goal | Higher Education |
| Corpus Needed | 3,500,000 |
| Present age of minor | 3 Years |
| Need the corpus when minor turns age | 18 Years |
| Current Interest rate | 7.1% |
| Monthly Contribution Needed | 10,882 |
At present, the government has held PPF rates unchanged for 8 consecutive quarters, effectively making it one of the highest-yielding risk-free instruments in the country. This has protected the 'real returns' (also known as inflation-adjusted returns) for the middle class.
That being said, going forward, if the PPF interest rates move down, your monthly contribution would also need to be increased to achieve the desired corpus.
The tax benefit
The contributions made towards the minor's PPF entitle the parent or legal guardian to a deduction under Section 80C of the Income Tax Act, 1961 (under the old tax regime) up to a sum of Rs 1.50 lakh in the financial year.
This deduction limit applies to combined deposits, i.e. all your minor children's PPF accounts (where you are the guardian) and self. So, there is no separate deduction for contributing to a minor's PPF account.
Nonetheless, the interest earned and the corpus built over the 15-year maturity tenure of the PPF account are completely tax-free.
In other words, the minor's PPF account enjoys a favourable Exempt-Exempt-Exempt (E-E-E) tax status, facilitating tax planning with investment planning.
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Are partial withdrawals permitted from a minor's PPF account if the money is needed?
Yes, partial withdrawal can only be made (using Form C) from the 7th financial year (i.e., after the completion of 6 full financial years from the year the account was opened). Only one partial withdrawal is allowed in a single financial year.
The maximum amount you can withdraw as a parent or legal guardian from a minor's PPF account is lowering of the following:
-50% of the balance in the account at the end of the immediately preceding financial year of partial withdrawal.
-50% of the balance at the end of the 4th year preceding the year of withdrawal.
So, there is sufficient liquidity.
Moreover, just like the maturity amount, partial withdrawals are completely exempt from tax.
However, if you are looking to meet the desired financial goal, ideally, partial withdrawals should be avoided through prudent planning.
What happens when the minor turns 18?
When the child turns major/adult, he/she can take over; the account can be transferred to his/her name.
A duly signed application needs to be submitted in this regard, along with age proof, address proof, and to comply with the KYC norms. The parent or legal guardian who originally opened the account may be required to attest this application.
If the account hasn't matured, the adult can operate the account and make contributions. If the account is about to mature, he/she could also decide to extend it beyond the 15-year term.
To Conclude
Opening a PPF account in the name of your child early on in his/her life and making systematic monthly contributions, plus making lump sums (whenever you have additional investible surplus or windfall), shall help you benefit from the power of compounding and build a respectable corpus for your child's future needs. The guaranteed fixed returns provided by PPF with utmost tax efficiency make it one of the most favourable avenues for long-term wealth creation.
Happy investing!
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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