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Public Provident Fund (PPF) is considered to be the most reliable and safe medium for savings and long-term investments among Indian families. This central government-backed scheme comes with a 100% sovereign guarantee, which means both your principal and interest are fully protected by the government. When it comes to financial planning, most people are limited to investing in their own name only. But if you open a separate PPF account in your wife’s name and start making regular monthly investments in it, it not only creates an independent and strong fund for her future but also provides the backbone of safe returns to the family’s overall portfolio.
The biggest strength of the PPF scheme is its ‘EEE’ i.e. Exempt-Exempt-Exempt category. The amount invested in it, the compound interest on it every year and the entire fund received on maturity of 15 years is 100% tax-free. Currently, based on the compound interest rate of 7.1% set by the government, if you deposit ₹3,000, ₹5,000, ₹8,000 or ₹10,000 every month, the magic of compounding creates a huge capital in 15 years.
Interest in Public Provident Fund is calculated on a monthly basis and is added to the account at the end of the financial year. Let us understand how much money will be deposited in your wife’s account after the full maturity period of 15 years at different monthly contributions:
1. Investment of ₹3,000 per month (₹36,000 annually): If you deposit ₹3,000 every month in your wife’s PPF account, your total investment in 15 years will be ₹5,40,000. At the current 7.1% compound interest rate, the total estimated interest during this period will be ₹4,36,837. Thus, after completion of 15 years, a total guaranteed tax-free fund of ₹ 9,76,837 (approximately ₹ 9.77 lakh) will be created in the name of the wife.
2. Investment of ₹5,000 per month (₹60,000 annually): If you increase the monthly investment to ₹5,000, the total capital accumulated by you over a period of 15 years will be ₹9,00,000. A total interest of ₹ 7,28,062 will be earned on this at the rate of 7.1%. At the time of maturity, your wife will receive a total lump sum amount of ₹16,28,062 (approximately ₹16.28 lakh).
3. Investment of ₹8,000 per month (₹96,000 annually): If you take a slightly more aggressive approach and contribute ₹8,000 every month, your total investment in 15 years will reach ₹14,40,000. The accumulated interest on this will be ₹ 11,64,900. As a result, the total return on maturity would result in a tax-free corpus of ₹26,04,900 (approximately ₹26.05 lakh).
4. Investment of ₹10,000 per month (₹1,20,000 annually): If you save ₹10,000 every month in your wife’s name, the total accumulated capital in 15 years will be ₹18,00,000. The interest received on this due to compounding will be ₹ 14,56,125, due to which after completion of 15 years, a total of ₹ 32,56,125 (approximately ₹ 32.56 lakh) will be in their hands.
Many taxpayers think that by transferring money in their wife’s name and investing it, they can completely avoid their tax liability. Here it is very important to understand the provisions of ‘Clubbing of Income’ under Section 64(1)(iv) of the Income Tax Act, 1961. If a husband gifts money to his non-working (housewife) wife and any income is generated from that money, then that income is added to the husband’s total income and is taxed as per the husband’s slab.
However, in case of PPF this rule works in your favor. Since the interest received from PPF is completely tax-exempt under Section 10(11) of the Income Tax Act, even if this interest is formally clubbed in your income under clubbing provisions, you still have to pay zero tax on it because it is tax-free income.
But do take a technical precaution: after 15 years, when the maturity amount of PPF (say ₹32 lakh) comes to the wife’s savings account and if she reinvests that entire amount in a bank fixed deposit (FD) or in the stock market, the new interest or capital gain from that FD or investment will be directly added to the husband’s taxable income under clubbing rules. Therefore, it is wise to plan the reinvestment of this fund in advance.
People often have this misconception that they can claim a total tax exemption of ₹ 3 lakh by depositing ₹ 1.5 lakh in their PPF account and ₹ 1.5 lakh in their wife’s PPF account. This notion is completely wrong. Under Section 80C of Income Tax, the maximum tax deduction limit per person is fixed at ₹ 1.5 lakh only.
If you are contributing to both your own PPF account and your wife’s PPF account, you can claim a maximum tax deduction of ₹ 1.5 lakh from both the accounts combined. Additionally, as per PPF rules, only a minimum of ₹500 and a maximum of ₹1.5 lakh can be deposited in an account in any one financial year. If you deposit ₹10,000 per month (₹1,20,000 annually) in your wife’s account, you will be able to avail the additional benefit of 80C only on ₹30,000 in your personal account in the same year.
One important banking rule should always be followed to get maximum interest from PPF. As per PPF rules, interest for that month is calculated only on the minimum balance in the account between the 5th of the month and the last day of the month. Therefore, deposit your monthly contribution every month between 1st and 5th. If you deposit money on or after the 6th, you will not get interest for that entire month and that amount will be counted in the next month’s interest calculation.
Another great feature of PPF is that after completion of 15 years, if you do not need the money immediately, you can extend it in blocks of 5 years each. You can carry it forward with fresh contributions by submitting Form H or just keep enjoying 7.1% compound interest on the existing fund without adding any new money. If the fund of ₹32.56 lakh is simply allowed to compound for the next 5 years without adding any additional money, the amount grows to approximately ₹46 lakh by the 20th year and over ₹65 lakh by the 25th year, which can become a phenomenal financial cushion for your wife’s retirement and financial independence.