Why you must open a PPF account for your child right away

You can open a Public Provident Fund (PPF) account for yourself and your minor child. There are a few reasons why you should open a PPF account for your child. Although compared to mutual funds and stocks markets the interest rates are not that lucrative, but sovereign guarantee, risk-free and income tax benefits under Section 80 C make it a popular investment option.

It’s not just about opening a PPF account, but you also need to be consistent with maintaining it as it has a lock-in period of 15 years. For instance, suppose you open a PPF account for your 10-year-old son. You start with a Rs 1,000 monthly contribution, and then he continues with the same amount until he turns 60. If the average return is 7.1%, he will accumulate a corpus of Rs 54,06,079. The investment tenure, in this case, will be 50 years.

But suppose his first contribution towards PPF is after joining his first job at 25. Instead of Rs 1,000, he contributes double the amount of Rs 2, 000 monthly. He will accumulate Rs 36,31,657 once he turns 60 at an average of 7.1% interest. The investment tenure, in this case, will be 35 years. He will still have a smaller corpus despite contributing a higher amount due to the investment tenure. So, this is the power of consistency.

The PPF rules allow any individual to subscribe to PPF on his own or on behalf of a minor of whom he is the guardian by depositing an amount not less than Rs 500 and not more than Rs. 1,50,000 in a year.

Extension of PPF account

PPF has a lock-in period of 15 years. Post the maturity, the account holder has two options – either to take the money and close the account or extend it. As per the extension rules, the account can be extended ‘n’ number of times for a block of five years each.

PPF interest rate

PPF currently offers an interest rate of 7.1%, compounded yearly. It comes with a EEE taxation benefit which means the capital, interest and maturity are tax-free.

Key things to know about PPF account in the name of minor

1) An individual on his or her own or on behalf of a minor of whom he/she is the guardian can open a PPF account in the name of the child. But remember that a PPF account cannot be opened in joint names.

2) The minimum amount that has to be deposited in a year is Rs 500 and a maximum Rs1.5 lakh.

3) The total amount deposited by you in PPF accounts in a financial year should not be more than Rs 1.5 lakh. In case you deposit more than this amount in your and your child’s account, interest and tax benefits will be denied on the amount over Rs 1.5 lakh.

4) When the minor turns 18, an application can be submitted to change the status from minor to major. The operation of the account can be handled by him/her.

5) Loans and other benefits like partial withdrawals from the minor’s account are also allowed.