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Investment In Your Minors’ PPF Accounts
Can Weave The Amazing Magic!


Investment In Your Minors’ PPF Accounts

Can Weave The Amazing Magic!

Every parent would naturally be concerned about building capital for his or her children, which would go to ensure meeting their financial requirements for higher education, marriage, settlement in life, etc. One of the major stumbling blocks in doing so are the clubbing provisions under Section 64(1A) of the Income-tax Act, which provide that any income arising to a minor child is required to be clubbed with the income of either the father or the mother, whosever’s total income is greater. Imaginative planning through investment in PPF (Public Provident Fund), can be resorted to achieve the objective of building up ‘tax free capital’ for children and in particular minors, successfully overcoming the hurdles of the clubbing provisions. 
Investment in PPF can be usefully resorted to achieve the twin objectives of building up tax free capital as also securing valuable tax saving through deduction under Section 80C. Section 10(11) of the Income-tax Act provides that the interest @ 8% per annum earned on the balance in the PPF Account is totally exempt from Income-tax. Moreover, section 80C of the Income-tax Act provides that any contribution made by an individual even in the account of his children (either minor or major) also qualifies for deduction out of gross total income. As per the current provisions of the PPF Scheme, the maximum contribution that can be made in the PPF account during the financial year is Rs.70,000.
Even after the introduction of the provisions of Section 56(2)(vii) in relation to treating gifts received exceeding Rs.50,000 as taxable income in the hands of the recipient, the contribution by an individual to the account of his minor child would fall within the exceptions carved out under the said section and not give rise to any taxability in the hands of the minor child. 

In the light of the above background, the following case study will highlight what magic PPF contribution by an individual in the account of his minor children can weave, for achieving the objective of building up tax free capital for them.  


 Case Study: Mr. and Mrs. Amdavadi are blessed with a son and a daughter. They are in the income bracket of over Rs.8,00,000, thus attracting income-tax at the marginal rate of 30.9% each. The couple would be well advised to open a PPF account in the names of each of their two children. Mr. Amdavadi should plan to annually contribute Rs.70,000 in the PPF account of his son and Mrs. Amdavadi can plan a similar contribution of Rs.70,000 in the PPF account of her daughter.
Benefits from the Planning 
  • The contribution made by the Amdavadi parents would not attract any incidence of Income-tax on receipt of gift as explained above

  • In respect of the total contribution of Rs.70,000 each made by  both the parents in the PPF accounts of their son and daughter respectively, they would each be eligible to secure an Income-tax saving at 30.9% of such contribution, being Rs.21,630 under Section 80C of the Income-tax Act. Considering the tax saving of Rs.21,630, the actual contribution of each, for the investment of Rs.70,000 each year would effectively work out to only Rs.48,370 each.

  •  The PPF account would earn interest at 8% per annum which would be totally free from Income-tax. Thus in effect, the clubbing provisions under the Income-tax Act would have no adverse consequence.

  • At the end of 20 years, the balance in the two accounts would grow to Rs.33,13,000 in each account. The parents would thus achieve the dream of building up a healthy capital of Rs.66,26,000 for their two children by the time they attain majority.


  • As seen above, the effective contribution required to be jointly made by the parents during the 20 years period would be only Rs.96,740 each year (deducting the tax saving of Rs.43,260 from the gross investment of Rs.1,40,000), which would go to finally build up a tax free capital of Rs.66,26,000 for the children in a period of only 20 years.


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