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Want money to multiply? Get PPF a/c for your kid
Sunil Dhawan, Outlook Money | February 20, 2007
The public provident fund (PPF) is not only a risk-free way to grow your wealth over a long term it is also a suitable investment for your kids. PPF allows you to invest your funds in your child's name without adding to your tax liability.
Since the interest from PPF is tax-free, any amount invested in your child's name makes the clubbing provision of income tax ineffective.
Here's how: If you consider investing the maximum allowed Rs 70,000 in a PPF over 15 years, assuming a rate of interest of 8 per cent, the tax-free maturity amount comes to about Rs 21 lakh (Rs 2.1 million). Though the returns are lower than a mutual fund, PPF guarantees your principal invested and returns.
How to go about it? You can contribute up to Rs 69,500 every year to a PPF account in the name of the child, major or minor, and only Rs 500 to your own account.
On completion of 15 years, opt for an extension every five years, in case your kids are still young. You don't have to make any further investment and your money continues to grow at the prevailing rate of interest. The same amount of Rs 21 lakh in the example, after another five years, yields about Rs 30.15 lakh, with no additional investment (See table: Prudent Moves).
For every Rs 70,000 invested in PPF, you save Rs 21,000 in taxes (30% tax bracket). Invest this in a mutual fund (average rate of growth 12%) an see the returns compound.
Your PPF investment ensures that you pay less taxes. You could invest what you save as taxes in mutual funds. This way, you are not exposing your entire fund to equities, while getting a safe kicker to generate better returns. Assume that you save Rs 21,000 as taxes on a PPF investment of Rs 70,000. This way you get an additional Rs 8.76 lakh (Rs 876,000) at the end of 15 years, for just 23 per cent of equity allocation in your investment of Rs 91,000.
Withdrawals: When the time comes to get your child married off or to send her for higher studies, your withdrawal option would depend on the amount required and other prevailing circumstances.
You can withdraw from your PPF account in instalments at the start of each extended period. If you have been continuing with fresh subscriptions, you can withdraw up to 60 per cent of your balance.
Remember, if you open a new account, you will not be allowed any withdrawals till the fifth year.
In case of any expenditure, use your equity investments first, if they have done well. It is advisable not to use your PPF fund. Even if you need to use it, use only the customary 60 per cent and continue the account to ensure your savings continue to grow. This could take care of your second child's needs, if you have one.
In the unlikely event (over a long term) that your equity investments takes a beating, you may have no option but to withdraw from your PPF. Your first choice as an investment option should be your last resort. For withdrawals, before encashing your PPF funds, liquidate your bank deposits, mutual funds and other equity investments.
Tap the PPF account at the end.
PPF: Your Child's First Friend
If you are a risk-averse individual and looking for the most dependable route to save for your children's future, sample this checklist. You won't find such attractive features anywhere else.