Every parent is naturally concerned about building a capital for his or her children, which would go to ensure meeting their financial commitments for higher education, marriage, settlement in life, etc. Barred from equity, one of the major stumbling block in investing in any financial instrument, which provides that any income is required to be taxed with the income of either the father or mother as the case may be. Imaginative planning through investment in PPF, can be resorted to achieve the twin objectives of building up ‘tax-free capital’ for children as also securing valuable tax saving through deduction under Section 80C by investing the maximum limit of amount is Rs 1.50 lakh p.a., which came to be raised from the earlier Rs 1 lakh with effect from 13th August, 2014 thanks to Modi-led government, it is hence left more room to create sizable corpus for their children as a  Wake up Call! Powerful Provident Fund (PPF)

PPF2

In the light of the background above, the following illustration will highlight what magic PPF contribution by an individual in his and her account can weave, for achieving the objective of building up tax free capital for them.

Mrs and Mr Trivedi have blessed with a son and a daughter. They are already in the income bracket at the marginal rate of 30.9% each. They are desirous to built-up an independent investment for each of the two children and secure a bright future career for them. At Prudent FP, both Mr Trivedi and Mrs Trivedi would be well advised to open a PPF account in the names of each of their two children. Mr Trivadi should plan to annually contribute Rs 1.50 lakh in the PPF account of his son and Mrs. Trivedi can plan an annual contribution of Rs 1.50 in the PPF account of her daughter as the total contribution makes up Rs 3 lakh. The contribution are proposed to be continued for 18 years i.e. until each child attains majority while keeping in mind they need to be disciplined with the PPF to make the most of it, and also meet their liquidity needs elsewhere, because with this investment their money would be blocked for 15 years.

PPF Growing Chart of Mr and Mrs Trivedi

Growth of Funds in PPF account during the 18 year term

on the basis of an Annual Contribution of Rs 3.00 lakh i.e. (Rs 1.50 lakh + Rs 1.50 lakh)

 

Year

Opening Balance Amount of Investment Total Investment Interest

Balance at the end of year

2014

0 3,00,000 3,00,000 26,100 3,26,100

2015

3,26,100 3,00,000 6,26,100 54,471

6,80,571

2016 6,80,571 3,00,000 9,80,571 85,310

10,65,880

2017

10,65,880 3,00,000 13,65,880 1,18,832 14,84,712
2018 14,84,712 3,00,000 17,84,712 1,55,270

19,39,982

2019

19,39,982 3,00,000 22,39,982 1,94,878 24,34,860
2020 24,34,860 3,00,000 27,34,860 2,37,933

29,72,793

2021

29,72,793 3,00,000 32,72,793 2,84,733 35,57,526
2022 35,57,526 3,00,000 38,57,526 3,35,605

41,93,131

2023

41,93,131 3,00,000 44,93,131 3,90,902 48,84,033
2024 48,84,033 3,00,000 51,84,033 4,51,011

56,35,044

2025

56,35,044 3,00,000 59,35,044 5,16,349 64,51,393
2026 64,51,393 3,00,000 67,51,393 5,87,371

73,38,764

2027

73,38,764 3,00,000 76,38,764 6,64,572 83,03,337
2028 83,03,337 3,00,000 86,03,337 7,48,490

93,51,827

2029

93,51,827 3,00,000 96,51,827 8,39,709 1,04,91,536
2030 1,04,91,536 3,00,000 1,07,91,536 9,38,864

1,17,30,400

2031

1,17,30,400 3,00,000 1,20,30,400 10,46,645 1,30,77,044
Total 54,00,000 76,77,044

1,30,77,044

 Benefits from the PPF Planning

In respect of the total contribution of Rs 1.50 lakh each made by Mr Trivedi and Mrs. Trivedi in the PPF accounts of their son and daughter respectively, they would each be eligible to secure an income-tax saving at 30.9% of such contribution, being Rs 46,350 under section 80C of the Income-Tax Act. Considering the tax saving of Rs 46,350, the actual contribution of each, for the investment of Rs 1.50 lakh each year would effectively work out to only Rs 1,03,650 each. The PPF account would earn interest at 8.70% per annum which would be totally free from Income tax. Thus in effect, the clubbing provisions under section 64 of the Income Tax act would have no adverse consequence. The growth of the PPF account would be thus free from the burden of any tax liabilities.

As you can apparently see that at the end of 18 years i.e .up to the attainment of majority of each of the child, the balance in two accounts would grow to Rs 65,38,522 in each account. Mr Trivedi and Mrs Trivedi would thus achieve the goal of building up a total capital of Rs 1,30,77,044 for their two children by the time they attain majority. As alluded above, the effective contribution required to be jointly made by them during the 18 years period would be only Rs 2,07,300 each year while deducting the tax saving of Rs 92,700 from the gross investment of Rs 3 lakh, which would go to finally build up a tax-free capital of Rs 1,30,77,044 for the children in a period of only 18 years which translates pre-tax return on the effective investment of Rs 2,07,300 as explained hereinabove that actually works out to 18.22% on your calculator. The comparative returns on the above basis for taxpayer in the tax bracket of 10.3% and 20.6% would accordingly work out to 14.04% and 15.86% respectively.

PPF Advice at Prudent FP

Take this advice in right earnest as every head of a family should plan to open a PPF Account in the name of each member major or minor, at the earliest point of time, if not with more, at least the minimum contribution of Rs 500 to make self-discipline to invest regularly, thanks to its locking-period of 15 years. To conclude, when choosing your tax saving avenue, be sure to choose according to your risk appetite. If you are a conservative to moderate investor, the PPF is a very good investment avenue. Even if you are an aggressive investor, the PPF can be a safe hedge against your more risky investments. Keep your liquidity needs, life goal time horizon and risk appetite in mind when investing.

Also Read: One Stop Shop for all things PPF!

 Image Courtesy: FreeDigialPhots.net

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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