The interest rates on Public Provident Fund (PPF) investments continue to remain stagnant at 7.1 percent prompting many parents to think if it is worth opening a PPF account for their kids. For the unversed, the government has put no bar on the age limit to open a PPF account for a minor child.
Paragraph 3 of the Public Provident Fund Scheme, 2019, allows any parent or legal guardian to open a PPF account in the name of a minor child. It’s important to note that only one PPF account can be opened in the name of an individual. The scheme does not impose any restrictions on the contributions made by either one or both parents to the PPF account of the minor child.
15-year lock-in period
To start with, many investors tend to ignore the inherent benefits of investing early, especially, in an investment option like PPF. Take, for example, an investor opens a PPF account for minor when his or her ward is three years old. The PPF investment must be continued for 15 long years. Also, if you are consistent with the investment, you will benefit from the magic of compounding.
The regular investments would ensure a decent corpus that would pay for the child’s college education and other professional courses that he or she decides to pursue. Here's how:
Yearly Investment: ₹1,50,000
Rate of Interest: 7.1%
Investment Tenure: 15 years
Invested Amount: ₹22,50,000
Total Interest Earned: ₹18,18,209
Maturity Value: ₹40,68,209
By the time the child turns 18 years old, there is already ₹40,68,209 earned, which is completely exempt from tax. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.
Once the minor child turns major, the PPF account can be transferred to his or her name. The new account holder can then decide to redeem the money earned or continue with the investment for the next five or 10 or 15 years depending on the availability of money for investment and long-term financial goals.
Undoubtedly, PPF is considered a secure investment choice. However, its drawback lies in the extended lock-in period of 15 years, which can pose liquidity challenges. Many parents rue about the lock-in period in PPF investments and therefore decide to postpone these investments till their ward turns 18 years old, thus, depriving them of the benefit of earning the much-desired wealth. Nonetheless, this drawback becomes less relevant for minor investors since they do not require access to the funds before they graduate high school, thereby eliminating or reducing the concern about liquidity.
An investment in PPF allows tax deductions and exemptions at all three stages of investment, earnings, and redemption.
Investments made in a PPF account are eligible for income tax exemptions on the principal amount. As per section 80C of the Income Tax Act of 1961, the entire invested amount can be claimed for a tax waiver. However, it's important to note that the maximum principal that can be invested in a financial year is limited to Rs. 1.5 lakh.
Furthermore, the interest earned on the PPF investment is also completely tax-free, adding to its appeal.
As a result, when the PPF account reaches maturity and the amount is redeemed, the entire sum remains exempt from taxation. This advantageous tax policy makes the PPF scheme a highly attractive investment option for many individuals in India.
Many investors rush to market-linked investments while throwing caution to the wind. No doubt, children-oriented equity schemes help earn more though one can never vouch for their security. If you are looking for an investment that secures your child’s future sans any hassle and market-related worries, then PPF may just be the right investment for your kid.