Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

WEAVING WONDERS VIA PPF!

With a net annual investment of just Rs.69,100 for 18 years, build tax free capital of Rs.43.59 lakhs for your child!

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 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.

ACHIEVING TWIN OBJECTIVES

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 @ 8.70% 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.1,00,000.  

Even under 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 falls 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, the following illustration 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.

Illustration: Dr. Amdavadi and Dr.(Mrs.) Amdavadi are blessed with a son and a daughter. They are in the income bracket of over Rs.10,00,000, thus attracting income-tax at the marginal rate of 30.9% each. They are desirous to build-up an independent investment for each of the two children and secure a bright future career for them. Both Dr. Amdavadi and Dr.(Mrs.) Amdavadi would be well advised to open a PPF account in the names of each of their two children. Dr. Amdavadi should plan to annually contribute Rs.1,00,000 in the PPF account of his son and Dr.(Mrs.) Amdavadi can plan an annual contribution of Rs.1,00,000 in the PPF account of her daughter (the total contribution being Rs.2,00,000). The contributions are proposed to be continued for 18 years i.e. until each child attains majority).

BENEFITS FROM PPF PLANNING

  • The contribution made by both Dr. Amdavadi and Dr.(Mrs.) Amdavadi would not attract any incidence of Income-tax on receipt of gift by the minor as explained above.

  • In respect of the total contribution of Rs.1,00,000 each made by Dr. Amdavadi and Dr.(Mrs.) Amdavadi 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.30,900 under Section 80C of the Income-tax Act. Considering the tax saving of Rs.30,900, the actual contribution of each, for the investment of Rs.1,00,000 each year would effectively work out to only Rs.69,100 each.

  • The PPF account would earn interest at 8.70% 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. The growth of the PPF accounts would be thus free from the burden of any tax liabilities.

  • At the end of 18 years, i.e. up to the attainment of majority of each of the child, the balance in the two accounts would grow to Rs.43,59,015 in each account. Dr. Amdavadi and Dr.(Mrs.)  Amdavadi would thus achieve the dream of building up a total capital of Rs.87,18,030 for their two children by the time they attain majority.

  • As seen above, the effective contribution required to be jointly made by them during the 18 years period would be only Rs.1,38,200 each year (deducting the tax saving of Rs.61,800 from the gross investment of Rs.2,00,000), which would go to finally build up a tax free capital of Rs. 87,18,030 for the children in a period of only 18 years.  

Every head of a family should plan to open a PPF Account in the name of each member (major or minor), at the earliest point of time, if not with more, atleast the minimum contribution of Rs.500. The advantage would be obvious, as the 15 year clock starts ticking from the moment you open the PPF Account! The earlier you sow, the earlier you will get to reap!

Why not resolve to open a PPF Account and start contributing for every child born in your family, in the first couple of months itself (as soon as you name the child)? By the time the minor child becomes major and starts earning taxable income, not only will he/she have a good saving to his/her credit, but will also be able to utilize the same for his/her own tax planning benefits. So act in time for ‘Peaceful Prosperity Forever’ (PPF)!

 

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