Jigar M. Patel
International Tax Attorney
Bulls or Bears may have their sway… but the evergreen PPF is there to stay. While the Public Provident Fund (PPF) continues to rank as a star investment, popular with all classes of taxpayers, it merits special attention of every parent concerned about building capital for his or her child, which would go to ensure meeting their financial requirements for higher education, marriage, settlement in life, etc.
PPF the Perfect Tool for Scrubbing the Clubbing Provisions
One of the major stumbling blocks in capital formation for the minors 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 Public Provident Fund (PPF), can well achieve the objective of building ‘tax free capital’ for children and in particular minors, successfully overcoming the hurdles of the clubbing provisions.
Twin Tax Benefits of Exempt Income and Investment Deduction
Section 10(11) of the Income-tax Act provides total income-tax exemption from interest earned (current rate is 7.10% per annum) on PPF account. It can also help secure valuable tax saving through deduction under Section 80C. 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. Under the PPF Scheme, the maximum contribution that can be made in a PPF account during a financial year is Rs. 1,50,000.
Rs. 1.10 Crores of Tax-Free Capital for Two Children in 18 Years
Illustration: Sharma couple in the income-tax bracket of 31.2% are keen to build-up independent investments for their son and daughter. They would be well advised to open a PPF account in the names of their two children, right from their birth. Mr. Sharma should plan to annually contribute Rs. 1,50,000 in the PPF account of their son and Mrs. Sharma can plan a similar contribution of Rs. 1,50,000 in the PPF account of the daughter.
Since the PPF account earns interest, which is fully tax exempt, in effect, the clubbing provisions in regard to minor’s income would have no adverse consequence. In fact, the current 7.1% tax exempt interest for PPF works out to an effective 10.32% pre-tax return for a taxpayer in the 31.2% tax bracket.
In respect of their annual contributions of Rs. 1,50,000 made in the PPF accounts of their son and daughter respectively, Mr. and Mrs. Sharma would each be eligible to secure an income-tax saving u/s. 80C at 31.20%. Considering the tax saving of Rs. 46,800, the actual contribution for the investment of Rs. 1,50,000 each year would effectively work out to only Rs. 1,03,200 each.
At the end of 18 years, the PPF balance in each account would have grown to Rs. 55,14,696 Lakhs (collectively Rs. 1,10,29,392 for the two), thus fulfilling the dream of the Sharma duo for building up tax-free capital for their children.
