Opening PPF account for spouse will help you save tax; here's how
By opening a PPF account in the spouse’s name the investor is essentially doubling the yearly investment limit but the ceiling on individual accounts will continue to be Rs 1.5 lakh in a year.
Public Provident Fund (PPF) continues to be the most popular long-term saving and tax-planning instrument for investors with zero risk appetite. PPF offers the dual benefit of wealth accumulation through compounding and tax deduction. An individual can invest upto Rs 1.5 lakh per year in a PPF account. PPF comes under the ‘Exempt, exempt, exempt’ or EEE category which means the investment amount, interest earned on interest and the maturity amount are all tax-exempt.
However, the yearly limit of Rs 1.5 lakh means that investors cannot make use of the tax-saving benefit for excess funds. This issue can be addressed if the investor parks excess funds by opening a PPF account in their spouse’s name.
As per Section 64 of the Income Tax Act, any income that accrues to your partner from the amount gifted by you shall be added to an individual's income. In the case of PPF, this is completely tax-free due to EEE, the clubbing provision shall not result in any implications.
By opening a PPF account in the spouse’s name the investor is essentially doubling the yearly investment limit but the ceiling on individual accounts will continue to be Rs 1.5 lakh in a year. The investor will also be able to claim income tax deduction on the entire Rs 3 lakh on interest earned and finally on maturity as well..
Because the source of funds deposited in both the PPF accounts is same, the income is added back with the original investor's but the interest earned is tax exempt and doesn’t get added back to original investor’s net income.
So, this option gives a married person an opportunity to double their contribution to the PPF account in a way. This is advisable in case for a particular year you have exhausted your 80C limit and wish to earn interest-free income. In this situation one can consider opening PPF account for their spouse. It is worth remembering that the overall income tax exemption under Section 80c on investments will continue to remain capped at Rs 1.5 lakh per annum.
The option can be a good choice for those who have low-risk appetite and do not want to invest in market-linked instruments such as NPS, mutual funds among others. PPF interest rate 2021 (Jan-March) quarter is 7.1%.