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Is Investing In Your Wife's PPF Account Legal?

PPF or Public Provident Fund is, without any doubt, one of the best fixed income investments.

It is a 100% safe Govt. of India scheme, at a competitive and guaranteed rate of interest. Moreover, the returns are totally exempt from income tax. Plus, icing on the cake, we can also claim tax deduction u/s 80C for the amount invested in PPF.

Therefore, most investors like to maximize their investment in PPF.

As such, given that the maximum investment permitted in an account is Rs.1.50 lakhs per financial year, they go to the extent opening multiple accounts... in the names of their spouse, children (minor and major), parents, etc.

In fact, many opinions and articles, even suggest ways and means to make deposits in multiple accounts and maximize the total investment in PPF in a year... far exceeding the specified limit. (For example, they even advise how a person with wife and two minor kids can invest Rs.6 lakhs in PPF.) The argument is that, as long as you are not claiming tax deduction u/s 80C in excess of Rs.1.50 lakhs, you can invest higher amounts. 

I, however, disagree with ALL these opinions.

I think we are breaking the law  if not in words, but at least in spirit  if we are investing more than Rs.1.50 lakhs in a year through different accounts. Even if we do not claim tax deduction u/s 80C for the extra amounts invested, we are still enjoying tax-free interest income. Therefore, it is wrong to invest more than Rs.1.50 lakhs in a year.

I would love to receive your critisims and comments, if you think I am wrong.

But, first let's see what the PPF Act and Rules have to say:

a. We can open ONLY ONE PPF account. Additional accounts, if any, will not be paid any interest.

b. Significantly, joint PPF accounts are NOT PERMITTED.

c. We can invest AT MOST Rs.1.50 lakhs per year in our PPF A/c.

d. We can open additional accounts as a guardian to our 'minor' children. However, the total amount invested in all accounts — self plus all minor children — put together cannot exceed the total limit of Rs.1.50 lakhs. [Therefore, it is clear cut and unambiguous law that you CANNOT invest Rs.1.50 lakhs in EACH of these accounts, as many people are doing.]

e. Only parents can open a minor’s account. Even grandparents are barred from opening PPF accounts for their grandchildren if the parents are alive. Only if the parents are dead, can grandparents become guardian to their grandchildren and open a PPF A/c for them.

f. Father and mother cannot both open a PPF account for the same minor.

From the above, we can clearly infer that the Govt. does not want us to invest more than Rs.1.50 lakhs in PPF in a year. Because, if the Govt. had no problems with multiple "deposits", they wouldn’t have put so many restrictions.

Another important clause in the PPF Act:
The exact wording in the PPF Act on Subscriptions to the Funds reads as "Any individual may, on his own behalf or on behalf of a minor, of whom he is the guardian, subscribe to the Fund in such manner and subject to such maximum and minimum limits as may be specified in the Scheme."

This clearly means that a person can invest only on his own behalf (and minors, within the specified limit)... AND NO ONE ELSE.

In view of the foregoing, how can anyone justify that it is ok to deposit in wife's or parents or major children's accounts, when there is a clear restriction on minor's accounts? I repeat — even if tax deduction u/s 80C is limited to Rs.1.50 lakhs, there is still the matter of not being taxed on the interest income.

Hence, it is wrong for one person to invest more than Rs.1.50 lakhs in a year.

Are we permitted to invest in our spouse's PPF account?

As mentioned earlier, I welcome all objections and arguments against my opinion.

Let's take this a bit further:

There's a clause in the Income Tax Act whereby income from all investments (which, of course, includes PPF) made from your money in the name of the spouse, has to be clubbed with your income. So, if you gift Rs.1.50 lakhs to your wife and she invests in a PPF account, you have to show the interest income in your IT Returns. Assuming you too have invested Rs.1.50 lakhs in your PPF A/c, you are enjoying double the specified limit.

So, legally speaking, investing Rs.1.50 lakhs each in own and spouses' account would be violating the law.

What if you gift Rs.1.50 lakhs to your parents or major children, where there is no provision of clubbing of income and they invest in a PPF Account?

Well, here one can say that legally in words we may not be breaking any law. However, in spirit, we are definitely wrong.

Having said that, I think we should move on and forget about PPF. Because, there is an alternative. So why get into all these legal complications?

The alternative is debt mutual funds:
i.  PPF offers market-linked interest, which is 7.6% p.a. at present. Typically, debt funds would also give more or less the same returns.

ii. PPF is tax free. LTCG from debt funds are taxed @20% with indexation benefit. But, given the inflation, the effective tax on debt funds too is likely to be practically nil over a 15-year period (in fact, after 5-6 years itself the tax liability may drop to near zero levels or even negative if the inflation is high).

Hence, there is no disadvantage in investing in debt funds vis-à-vis PPF. In fact, debt funds are completely liquid whereas PPF money is not so readily accessible. (As regards tax saving u/s 80C, there are many other options to choose from.)

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