Close irregular PPF accounts of minors, shift to MFs, long-term FDs

The Ministry of Finance’s Department of Economic Affairs issued new guidelines on August 21, 2024, related to Public Provident Fund (PPF) for minors, multiple PPF accounts, and PPF accounts held by non-resident Indians (NRIs). These guidelines will come into effect from October 1, 2024. “The government’s move will ensure compliance and give account holders a chance to correct discrepancies,” says M. Barve, founder, MB Wealth Financial Solutions.

Irregular account in minor’s name

Interest on an irregular PPF account opened in a minor’s name will be paid at the Post Office Savings Account rate 

(4 per cent) until the minor turns 18. After that, the minor can open their own account and earn the usual rate (7.1 per cent).

 

“Many parents open PPF accounts in their children’s names to fund future expenses. Given these changes, they should consider other options to build a robust education and marriage corpus,” says Jinal Mehta, founder, Beyond Learning Finance.

Among alternatives that parents can consider, Barve suggests long-term fixed deposits and systematic investment plans (SIPs) in mutual funds.

 

Multiple PPF accounts
 

In case of multiple PPF accounts, the primary account will earn the scheme interest rate as long as deposits are within the annual limit (Rs 1.5 lakh). The account holder must choose two accounts in any post office or bank and designate one as the primary account. The balance in the second account will merge with the primary account, while observing the annual investment limit. The primary account will continue to earn the scheme interest rate. The excess balance in the second account will be repaid with zero per cent interest. All other accounts will earn no interest from the date of opening.
 

The current PPF rate of 7.1 per cent tax-free is attractive. “For horizons of over five years, consider stocks, mutual funds, or PMS. Equities, while riskier, can provide returns of 12-12.5 per cent, roughly 11 per cent after taxes, outperforming PPF,” says Lakshay Gupta, founder, Stealth Wealth.
 

Long-term tax-saving FDs can also be considered after the PPF limit has been exhausted.  
 

Extension of PPF account by NRIs
 

Extended PPF accounts of NRIs, where the residency status is an issue, will earn the post office savings account rate until September 30, 2024. After that, these accounts will earn zero interest. Many individuals opened PPF accounts, left India, and became NRIs, but failed to update their status. “A few years ago, a rule banned NRIs from holding PPF accounts but allowed existing ones to stay active until maturity without renewal,” says Kalpesh Ashar, certified financial planner and a Sebi registered investment adviser (RIA).
 

Many NRIs continued contributing, perhaps unaware of the changes. The new rule now imposes zero interest on such accounts after September 30.
 

According to Cleartax, a person is considered a resident Indian for a financial year if she satisfies any of the following conditions: she was in India for 182 days or more during the financial year; or she was in India for 60 days or more in the previous year and for 365 days or more in the four years immediately preceding the previous year.
 

“NRIs should close their PPF accounts at maturity, move funds to a non-resident ordinary (NRO) account, and disclose their residency status. Compliance is the key to avoiding issues in the future,” says Ashar.