Inconsistency in policies relating to PPF deposits by HUF- HUF should be allowed to make deposit in PPF directly and some more suggestions.

[C.A. DEV KUMAR KOTHARI]

Relevant provisions, references and links:

Public Provident Fund Act, 1968.

Public Provident Fund Scheme, 1968.

Clause (v) of sub-section (2) and sub-section (4) of  section 80C. { in short S.80C(2)(v) and 80C (4) }of the income Tax Act 1961 governing deduction from gross total income in respect of deposit in PPF account.

Notification No. 222/ 2005, dated 03.11.2005 (on re-insertion of section 80C w.e.f. 01.04.2006)

Section 88 (2) (v) and 88 (4)(a)(ii)   read with Notification no.  SO 55(E), It. 31.01.1991 in relation to tax rebate which was prescribed during period when deduction u/s 80C was not allowed and in lieu thereof tax rebate was allowed.

S. 10(11) read with notification No. SO 2430, dated 02.07.1968 granting exemption of interest on PPF from inclusion in taxable income.

PPF deposits:

On reading of the above referred provisions we find that a deduction under section 80C is allowable even to an assessee being HUF, if HUF makes deposit in PPF account in any account in name of any of its members. Similarly tax rebate under section 88  was also allowed  for such deposit by HUF in name of any of its member during period when deduction u/s 80C was not allowed and in lieu thereof tax rebate was allowed.

Thus we find that in the Income-tax act, 1961  deduction or rebate is allowed to an assessee being HUF also if a deposit is made in account standing in name of any of its member.

Account in name of HUF:

An account in name of Hindu Undivided Family could be opened prior to the 13th day of May, 2005. However, from 13^th day of May  2005 restriction was imposed and new account in name of HUF were stopped by way of an amendment in the regulations governing  PPF account.

However, deduction / rebate for contributions made by HUF in name of any of its member continued to be allowed under the provisions of Income tax act,1961. Exemption is also continued.

Inconsistency in provisions vis a vis policy:

The provisions of Income-tax Act and PPF both are regulated by the Central Government. Therefore, we find that there is inconsistency in provisions vis a vis the policy. As per policy, an incentive is given for investment in PPF to HUF also. HUF is also eligible to get deduction / rebate for such investment in name of HUF or in any of any of its members.

PPF in name of account of HUF will be easy to administer:

For easy reconciliation, verification and keeping a track on transactions it would be convenient and better option if PPF account and other such investments are also allowed in name of HUF. In case of PPF the interest is allowed @ 8% and it is tax free. Generally investment in PPF is a long term investment. Particularly for people who want to invest in name of individual members as well as in name of HUF, general trend is that investment in PPF is long term investment. Therefore, long term funds are collected by way of PPF. 

Know Your Customer (KYC) and PPF:

Under KYC postal department and banks are also registering investors after verifying name, description and  address proof etc. It is now compulsory to get registered under KYC for making any investment in small savings including national saving certificates.

Compliance of KYC for HUF can also be made with name of its Karta and members. If investment is made directly in name of HUF, it will be easy to consider and allow deduction. In case an investment is made in name of member, it require more enquiry as to whether the person concerned is a member, whether funds are invested by HUF or member, whether double deduction in name of HUF and member both have not been considered etc. 

Compulsory closure of PPF account in name of HUF:

As noted earlier in this write-up, account in name of HUF were discontinued from 13.05.2005. Now the government has decided that all accounts opened in name of HUF shall be compulsorily closed. The recent notification vide F.No. F.7/4/2008-NS.II dt. 7th December, 2010 issued by the Ministry of finance, Department of Economic Affairs ,  in this regard reads as follows (with highlights provided for analysis:

           "G.S.R. 956 (E). - In exercise of the powers conferred by sub-section (4) of Section 3 of the Public Provident Fund Act, 1968 (23 of 1968), the Central Government hereby makes the following Scheme further to amend the Public Provident Fund Scheme, 1968, namely :- 

1.  (1) This scheme may be called the Public Provident Fund (Amendment) Scheme, 2010. 
 
(2) It shall come into force on the date of its publication in the Official Gazette.

2.  In the Public Provident Fund Scheme, 1968 in paragraph 9, in sub-paragraph (3), after the proviso, the following proviso shall be inserted, namely :-

                "Provided further that an account opened on behalf of a Hindu Undivided Family prior to the 13th day of May, 2005, shall be closed after expiry of fifteen years from the end of the year in which the initial subscription was made and the entire amount standing at the credit of the subscriber shall be refunded, after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him. In the case of accounts opened on behalf of Hindu Undivided Family, where fifteen years from end of the year in which initial subscription was made, has already been completed, they shall also be closed at the end of the current year, i.e. the 31st day of March, 2011 and the entire amount standing at the credit of the subscriber shall be refunded, after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him."                                   

Thus, we find that old  PPF accounts standing in name of HUF who have completed fifteen years since close of the financial year in which first subscription / deposit was made shall be compulsorily closed on 31^st march 2011 (unless a/c holder choose to close if earlier). In respect of accounts for which such period of fifteen years is not yet over, they shall also be compulsorily after expiry of period of such fifteen years. 

RBI has also issued instruction to banks and other concerned to implement this decision.

Suggestion and request:

It is suggested and requested to concerned authorities to revert back on old method of opening account in name of HUF also and allow investment in name of HUF. A proper analysis would reveal that there are not many families who can afford full investment so as to avail maximum benefit of deductions and tax exemptions. It is not a case that PPF is only option, there are other options also available. Therefore, investor should be given freedom to choose and invest in name of individual members and HUF.

It may be that some very rich people may also get benefit of tax free and tax incentive based investment in PPF, however, for them the tax benefit is like a peanut. However, for bias against such few people, a large number of middle class should not be denied benefit of investing in PPF on behalf of HUF.

Investment in PPF is a means whereby long-term capital base is created for individuals, families and society at large. The benefit of such long-term capital base should be given due credence. On such consideration it is requested and suggested that:

Investment directly in name of HUF should be allowed,

Limits of deposit in PPF may be increased.

Gestation period for withdrawal may be increased and bulk withdrawals may be further restricted.       

Such measures will make rules more consistent with policy towards creation of long-term capital base.