The Public Provident Fund account is a preferred investment option primarily for two reasons; one it is backed by the sovereign guarantee and hence safe and second the instrument is tax exempt in respect of the investment made, interest earned from it and maturity proceeds. For the October-December quarter, PPF is offering a return of 8% per annum.

As per the rules PPF account allow an individual to open an account for himself as well as in the name of his minor child. Here are specified reasons why you should open a PPF account for your minor child.

1. Liquidity problem can be mitigated or reduced: PPF account features a 15 year lock-in period from the end of the financial year in which the account was opened. So, if you open the account for your minor child during early years of his or her life, by the time he or she attains maturity i.e turns 18 years of age, the account would have either matured or shall be close to maturity.

But here in you need to note that if you also maintain the Public Provident Fund account in your name other than for your child, you can deposit a maximum of Rs. 1.5 lakh in a financial year in both the accounts and avail of the allowed deductions under section 80C. This threshold limit also stands valid in case of a single PPF account.

After your minor child in whose name the PPF account has been opened becomes a major, he or she will be liable to operate the account. Also, in a case, if the mandatory lock-in period has ended, he or she can choose to extend the account or close it.

The main advantage that your child will reap from you opening an account for him or her early in life is that he or she will now have a PPF account with a comparatively shorter maturity time as against the mandatory lock-in of 15 years i.e. there at the time of opening the account. Thus, the liquidity problem associated with maintaining a PPF account due to a longer lock-in can be reduced to a great extent.

2. Partial withdrawal allowed: PPF rules allow the account holder to withdraw funds from the account from the seventh year depending on certain terms and conditions. But for an extended PPF account, the rules vary and the maximum withdrawal amount allowed depends on whether the account has been extended with or without contributions.

If the PPF account is extended beyond its regular maturity with contribution then the withdrawal amount during the 5-year block period cannot be over 60% of the balance maintained at the time of extending the account. But in case the account is extended without contribution there is no limitation and any amount can be withdrawn depending on the available balance.

So, after running for quite some time already, the PPF account can be looked up to in case your child needs funds for some short-term course etc. while the balance will continue to fetch you return.

Source: Goodreturns