I had a discussion with a friend about investing in a PPF account a few weeks ago. We discussed how investing in a PPF account was capped at Rs 1.5 lacs per account.
If you are married, you can invest 3 rupees per year (1.5 rupees in your account and 1.5 rupees in your spouse’s account). You cannot exceed the limit of Rs 3 lacs even if you have children as the contribution to the PPF account of underage children will also be counted as your contribution.
He pointed out that you and your spouse could invest more than Rs 3 lacs per fiscal year and explained how to do that. To be honest, I hadn’t thought about this trick that much before.
Let’s see how it works.
What is a restriction under the PPF Act?
- You cannot invest more than Rs 1.5 lacs per fiscal year in the PPF account.
- A guardian must be available for the PPF account opened in the name of a minor.
- Guardian must be either mother or father. If the parents are not alive or unable to act, a legal guardian can also act as a guardian in the minor’s PPF account.
- Clearly, once a minor becomes a major, there is no guardian on the account.
- If you have opened a PPF account for your children (where you act as a guardian) or another PPF account where you are a guardian (legal guardian), you cannot put more than 1.5 rupees in all accounts combined invest (your account and those accounts that you are guardian of).
- Interest is not paid on the excess.
Let’s say you open a PPF account for yourself and your child. You act as the guardian in the account. If you deposit Rs 1 Lac into your child’s PPF account, you cannot deposit more than Rs 50,000 into their own account in the same fiscal year.
What is NOT a restriction under the PPF Act?
- You can fund your spouse’s PPF account.
- You can fund your minor child’s PPF account if you are a guardian.
- You can contribute to your minor child’s PPF account if you are NOT a guardian. To put it another way, yesYou can also fund your child’s PPF account if your spouse is the guardian.
- You can fund your older child’s PPF account.
How do you invest more than Rs 3 lacs?
Point (3) in the previous section is very interesting.
The Rs 1.5 lacs limit on investments only applies to your own account and the accounts of which you are the guardian.
What about investing in the PPF account of children who are not a legal guardian (in a PPF account)? Apparently this is not a cap except that no PPF account can receive a contribution worth more than Rs 1.5 lacs in a year.
Let’s look at an example. There are 4 members in the family.
Husband (H), wife (W), son (S) and daughter (D).
S and D are minors.
Let’s say they all have PPF accounts.
H is the guardian in S’s PPF account while W acts as guardian in D’s PPF account.
Consider the following scenario.
- H contributes Rs 1.5 lacs to his PPF account.
- W contributes Rs 1.5 lacs to her PPF account.
- H contributes Rs 1.5 lacs to S.
- W contributes Rs 1.5 lacs to D’s PPF account.
To put it another way
Hs PPF account: Rs 1.5 lacs personal investment
W’s PPF account: Rs 1.5 lacs personal investment
PPF account of S (H is guardian): Rs 1.5 lacs from W
D’s PPF account (W is guardian): Rs 1.5 lacs from H
If you see, none of the restrictions of the PPF Act have been violated.
The limitations were:
- H cannot contribute more than Rs 1.5 lacs to his and S accounts, ie H’s contribution to H + S cannot exceed Rs 1.5 lacs. H did not contribute anything to S’s PPF account. Hence, his total investment in his and S’s account is only Rs 1.5 lacs. W contributed to S’s PPF account. So we are safe.
- W cannot deposit more than Rs 1.5 lacs into her and D’s accounts. W did not contribute anything to D’s PPF account. We are safe here too.
As a result, Rs 6 lacs went to the family’s PPF accounts but there is no violation of PPF law.
This is just an illustration. We could have had many alternative scenarios. If H and W had more than 2 children, they could have invested even more.
What does the Income Tax Act say?
The upper limit of Rs 1.5 lacs for investments in the PPF account comes from the PPF Act.
The income tax law does not interfere.
Section 80C of the Income Tax Act only mentions that you will receive tax benefits on contributions up to Rs 1.5 lacs in your PPF account or the PPF accounts of your spouse and children (both major and minor). You don’t even have to be a guardian on your child’s PPF account (your spouse can be the guardian) to benefit from tax benefits. That’s it.
Therefore, under Income Tax Act, it doesn’t matter whether you invest Rs 5,000, Rs 50,000, or Rs 5 lacs in PPF. You can invest any amount. There is no violation of the Income Tax Act. Except that the tax break is limited to Rs 1.5 Lacs per person per fiscal year.
What do I think of that?
Such investments may be legally permissible but do not seem right in spirit. The cap on PPF investment is due to the fact that PPF falls into the EEE product basket and also generates slightly cheap debt returns.
Hence, if you invest more in PPFs (they lose taxes) it is a burden on the government.
For example, if you continue with the same example,
Hs PPF account: Rs 1.5 lacs of W.
W’s PPF account: Rs 1.5 lacs of H
PPF account of S (H is guardian): Rs 1.5 lacs from H
D’s PPF account (W is guardian): Rs 1.5 lacs from W
This is also allowed. However, you can see that H and W are investing in each other’s account (rather than their own).
They could have invested in their own accounts, but not just to maximize family investment in PPF.
That doesn’t look RIGHT, does it?
Something that doesn’t look right can always be challenged by the authorities. It’s about interpretation.
Well, at the same time, there are many provisions in the Income Tax Act that don’t look right in spirit.
What should i do?
Well, you have to be married and have kids to do this type of juggler.
First of all, you need to consider whether and how much you need to invest in PPF. If you are already investing in EPF, the need for large investments in PPF may automatically decrease.
PPF is a long term debt product. So when investing for the long term, consider getting hold of growth investments like stocks.
You do NOT want to be in a position where your propensity for PPF and the existence of such loopholes in the system are crowding out other investments.
Even Rs 3 lacs a year is a lot of money. You need to see if a raise to Rs 4.5 lacs (one child) or Rs 6 lacs (two children) or even more fits your overall planning. If your love for PPF made it your only big investment, then you need to reconsider your strategy.
Diversify your investments across asset classes and also within asset classes.
Furthermore, as I mentioned earlier, it is NOT right in spirit. Such investments can be challenged. Therefore personally, I will not exceed the limit of Rs 3 lacs per year (Rs 1.5 lacs each for myself and my spouse) even if I had the financial strength to exceed the limit.
So, in my opinion, this post is more about theory than practical application.