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

PPF MAGIC UNSTOPPABLE!

You Can Build Amazing Tax Free Capital

For Your Children Via Investment In PPF!

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.

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. 

 Gift-tax having been abolished and the provision of taxing gifts as income also exempting gifts to a relative, any amount of contribution made by an individual in the PPF account opened in the name of his children would not attract any liability to tax. 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: Dr. and Mrs. Modi are blessed with a son and a daughter. They are in the top tax bracket 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. The Modi couple would be well advised to open a PPF account in the names of each of their two children. Dr. Modi should plan to annually contribute Rs.70,000 in the PPF account of his son and Mrs. Modi can plan an annual contribution of Rs.70,000 in the PPF account of her daughter (the total contribution being Rs.1,40,000). The contributions are proposed to be continued until each child attains the age of 18, 21 or 25 years and gets settled in his or her life or career.

 All Round Tax Benefits!

             In respect of the contribution of Rs.70,000 each made by Dr. & Mrs. Modi in the PPF accounts of their son and daughter respectively, they would 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.

             As explained hereinabove, the growth of the PPF accounts would be free from the burden of all tax liabilities, in respect of income, clubbing, as well as gift. And with these plethora of benefits, just take a look at what amazing growth the Modi couple can effectively achieve in each of the two PPF accounts of their children at the end of 18, 21 or 25 years.

 BUILDING TAX FREE CAPITAL FOR YOUR CHILDREN

Annual contribution of Rs.70,000*

Growth in PPF account

– for 18 years

Rs.28,31,238

– for 21 years

Rs.38,11,973

– for 25 years

Rs.55,26,809

 *Considering benefit of 80C deduction, your effective annual contribution is only Rs.48,370

           Readers may send questions or feedback on

mukesh@taxingtimes.in

 

 

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