Hindu undivided families (HUFs) will now have to mandatorily exit from the public provident fund (PPF) on completion of 15 years. The move is aimed at checking misuse as several people were investing in PPF to earn 8% tax-free return as an individual as well as an HUF, which are set up by family members to avail of tax benefits.
The head of the family is the karta or the main operator of the account, with the others being family members. While daughters can be members of an HUF, on marriage, they cease to be members of the one promoted by their fathers.
After the government stopped fresh investment by HUFs in PPF from May 2005, several of them continued to park funds in the popular savings scheme as it earned them a 8% tax-free interest. Some were older investments though they were yet to complete the 15-year period while others availed of a five-year extension.
But a recent finance ministry notification has said that money should be refunded as soon as the 15-year period ends for PPF accounts opened by HUFs before May 13, 2005. For the accounts where the 15-year period has already ended, the money will be refunded on March 31 next year.
This means accounts opened after the ban was imposed in 2005 will be allowed to continue only till the tenure ends, while the others will be terminated at the end of the current financial year.
There are many accounts which are running on a fiveyear extension. But, with the current rule, they will be terminated by March end, no matter whether theextension period has ended or not, said a source dealing with PPF and other small savings schemes such as the National Savings Certificate ( NSC) and post office deposits.
Fresh investments by HUFs into PPF was stopped as it was observed that the facility was being misused.
Investments were made in the name of HUFs as well as individuals as both are considered as separate entities. This allowed the investors to earn 8% tax-free returns both as an HUF and an individual . This continued even after the ban came into place.
The philosophy of small savings is to provide a savings window to the middle class or those living in remote areas where banking services are not available.