Sukanya Samriddhi Scheme: Should you invest?

The Government of India had notified Sukanya Samriddhi Scheme /Yojana (SSY) in December 2014. In the latest budget, interest from the scheme has been made tax exempt. In this post, we discuss what this scheme is all about, its salient features and how it fares against its closest competing product, Public Provident Fund (PPF). Finally, after the analysis, we discuss whether you should invest in such a scheme for your daughter

What is Sukanya Samriddhi Scheme all about?

The Sukanya Samriddhi Scheme was notified in December 2014 as part of the Prime Minister’s Beti Bachao Beti Padhao initiative and investments into the account are eligible for deduction under Income Tax section 80C. The account can only be opened in the name of girl child less than 10 years of age and shall earn a fixed rate of interest (9.1% for FY2014-2015) as notified by government every year.

Who can open an account?

A SSY account can be opened by a parent or a legal guardian in name of a girl whose age is not more than 10 years. For this year, a grace period of one year has been given i.e. any girl child born between December 2, 2003 and December 1, 2004 can open an account up to December 1, 2015. Thus, no such account can be opened for a girl child born before December 2, 2003. Account can be opened in any post office or specified commercial banks. You need birth certificate of the girl child along with a residence and an identity proof of the depositor for opening the account.

Salient features of the scheme/account:

1. Only one account can be opened in name of a girl child.
2. Parents/legal guardian can open such account only for a maximum of two girl children. Parents/legal guardian can open a third account only in the event of birth of twin girls as second birth or if the first birth results into three girl children.
3. Maturity: The account shall mature on the completion of 21 years from the date of opening of account or the marriage of the account holder, whichever is earlier. In case of closure of account due to the marriage of the account holder, the account holder has to submit an affidavit that she is not less than 18 years of age as on date of closing of account. Please note maturity of the account has nothing to do with the account holder turning 21. In case the account is not closed after maturity, balance in the account shall continue to earn interest specified for the scheme.
4. Restrictions on investment/deposit: A minimum of Rs 1,000 and a maximum of Rs 1.50,000 can be deposited in an account in a financial year.You can make deposits in the account only for a period of 14 years. There shall be no deposits allowed for the period 15-21 years (from opening the account). However, the government will continue to pay interest during period from 15 to 21 years.
5. Rate of return: Under the scheme, the interest rate is not fixed and shall be notified by the government every year. For the financial year 2014-2015, the applicable interest rate is 9.1% (8.7% for PPF). So, if you open an account for your new born girl child and you let run the account for full 21 years, your annual investment of Rs 1,00,000 per year for 14 years will compound to approximately Rs 78.0 lacs at the end of 21 years (assuming interest rate remains constant at 9.1% per annum).
6. Liquidity: Like PPF, there is no liquidity in the initial years. No withdrawal is allowed before the account holder (girl) turns 18. Up to 50% of the accumulated corpus (at the end of preceding financial year) can be withdrawn for the purpose of higher education or marriage subject to the condition that the girl child has turned 18.
7. Tax benefits: With the latest budget making the income/interest from the Scheme tax free, the scheme falls in the category of EEE (Exempt-Exempt-Exempt) products, i.e. your investment in the scheme qualifies for tax deduction, interest earned during the accumulation phase is exempt from tax and there is no tax applicable at the time of withdrawal. The investment into the scheme qualifies for deduction under Income Tax section 80C. Please note that the allowable deduction is subject to an overall ceiling of Rs 1,50,000 per financial year for investment into all the products eligible for a similar deduction.

Comparison with Public Provident Fund:

Should you invest?

With the favourable change in tax structure, the SSY has become a credible alternative to PPF if your aim is to save for higher education or marriage of your girl child. Through this initiative, government wants to ensure welfare of the girl child by encouraging savings in the name of the girl child. By putting restrictions on the product maturity (21 years) and the deposit term (14 years), government has made it clear that it does not want to develop a competitor to PPF as a long term saving tool for retirement. One cannot find fault with the government’s intent. SSY is just not intended to be a retirement product.

SSY is a long term debt product (with no equity upside) and hence the return in the scheme over the long term may struggle to meet inflation in expenses for higher education and marriage of your daughter. Additionally, it is just one of the products that qualify for tax deduction under Income Tax section 80C. There is no additional tax benefit solely for investing in SSY. A separate tax deduction limit (as given to NPS) would have given a strong fillip to the product. Please note it is still early days for the product. The government may offer further incentives for investing into this scheme over the next few years.

PersonalFinancePlan Recommendation:

We recommend you can make a small start in the scheme and make it a part of your debt portfolio. With the government’s focus on welfare of the girls/women, you can expect further incentives for investments into the scheme. By making a small start, you will ensure that your daughter is atleast eligible to open such an account (by opening such account before she turns 10).

Additionally, you must also open a PPF account in the name of your daughter as it provides greater flexibility and can be used as a savings tool even after her marriage or closure of her Sukanya Samriddhi account. You can invest 50% of your investable money (for PPF and SSY) into PPF and the remaining into SSY account. As and when incentives for the SSY scheme improve, you can revisit and adjust your annual contribution to the two schemes.

Since these are debt based products and struggle to counter inflation, you must invest in equity mutual funds in addition to PPF and SSY account build corpus for your daughter’s education and marriage expenses.

Deepesh is Founder, PersonalFinancePlan