A friend recently asked me about the newly launched Sukanya Samriddhi scheme. Though I wanted to tell him that for long term, equity MFs are the best bet, I still refrained from giving him an immediate reply and decided to do a little research.
To be honest, I had been hearing this from all quarters that this scheme was a safe option for investment…something on lines of PPF. But I was not sure myself. So I decided to do my bit.
So here is a small guide, which I think covers most of the aspects and features of Sukanya Samriddhi scheme.
What is Sukanya Samriddhi Account (SSA)?
SSA is a new and supposedly risk-free investment product, launched by the government a few months back. It is an investment scheme, launched especially for the girl child. But tax deductions (benefits), can also be claimed by the parents.
The claimed objective of the scheme is to help parents create a corpus of funds for girl child’s education and marriage. But while researching for this topic online, I read it somewhere that with this scheme, government is trying to send out a social message too that girl child is not a burden. And if planned well in advance (through schemes like SSA), it is possible for parents to secure a girl’s future.
People compare SSA with PPF due to similar structure, interests, etc. But it’s not entirely correct to compare, as PPF is not linked to any specific purpose. Whereas SSA, has a very clearly defined end-purpose of girl’s education and marriage.
But how will the government ensure that funds are being used either for education and marriage of the girl child, is another topic of debate (which I don’t intend to cover) in this post. I just hope that this good intentioned scheme is not used primarily for dowry-accumulation, because if that is the case, then it will be really sad.
Who can open a Sukanya Samriddhi Account (SSA) and for whom?
SSA can only be opened for a girl child who is not more than 10 years of age. But for the first year of its operation, government has given a grace period of one year (valid upto 1stDec 2015) – this means that account can also be opened for a girl who is born between 2nd December 2003 and 1st December 2004.
Only parents or legal guardian of the girl can open this account. And it has to be opened in the name of the child. Please note that you are only allowed to open one account for one girl child. And a maximum of two accounts can be opened for two girls.
How much money can be deposited?
A minimum of Rs 1000 has to be deposited in SSA, in every financial year. And the upper limit has also been set at Rs 1.5 Lacs. But there is no cap on the number of deposit transaction you can make in a given year.
When the account is opened for the first time, you have to mandatorily deposit a minimum of Rs 1000.
But what if you are not able to deposit any money in a particular year? Or you deposit an amount less than minimum required amount of Rs 1000? Don’t worry. For each defaulted year, a small penalty of Rs 50 has to be paid to regularize the account. But please remember that along with the penalty, you also need to pay the minimum of Rs 1000/- for each defaulted year.
An irregular account can be regularized anytime till the completion of first 14 years.
But there is one small issue with the deposit transactions in SSA. As of now, the deposit can only be made by Cash, Cheque or Demand Draft – But Not Online. For those of us who are so used to doing almost all investment related transactions online, this is a big turn-off. But my guess is that it is only a matter of time before online option is made available.
What are the Interest Rates?
For 2015-16, the interest rate for Sukanya Samriddhi Account has been notified as 9.2%, calculated on a monthly basis but added to the account on yearly basis. This interest income is Tax Free (announced in 2015 Budget).
Previously, the rate offered for SSA was 9.1%. Please note that this rate is not fixed and will be notified every year, just like it is done for PPF.
Currently the PPF gives 8.7% and hence on just interest rate basis, SSA @ 9.2% seems to be a better bet. But since these rates are to be revised every year, we cannot be sure whether SSA will always have a better rate than PPF or not. But my guess is that since SSA is also about a social cause, chances of SSA rates going below PPF seem low, atleast for next few years.
But does it mean that SSA is better than PPF? I will request you not to judge the two products solely on basis of interest rates. There are few more important criterias, which should be taken into account before taking a final call.
What is the Duration of the Scheme?
The scheme matures on completion of 21 years from the date of account opening or as the girl child gets married, whichever is earlier. Please note that the girl attaining the age of 21 years has no relevance to maturity period of this scheme.
Though scheme duration is 21 years, you are only allowed to make deposit contributions for first 14 years. After the 14th year, you cannot make any further contribution, but the account continues to earn interest at the notified rates on balance amount for the rest 7 years (upto 21st year).
A few important things to note here are that in case the account is not closed on maturity (even after 21 years), the balance amount will continue to earn interest as specified for the scheme every year. And in case the marriage of girl takes place before the maturity date (i.e. before completion of 21 years), neither any further operation of this account will be permitted nor any interest will be payable beyond the date of marriage.
When is the money paid out?
SSA matures after 21 years of account opening. But money can also be withdrawn for marriage before this 21-year period. But for that, parents have to give an affidavit confirming that girl is an adult (18+ years) and hence reducing the use of money for child marriage.
I am still not sure how government will ensure that money is being used for marriage or education. Please feel free to share your thoughts on this.
Parents are also allowed to withdraw 50% of the balance amount after the girl reaches 18 years of age. But this can only be done for use in girl’s education. Rest of the money is to be left in the account so that it can be used for the marriage purpose.
What are the Tax Benefits for Sukanya Samriddhi Scheme?
The Budget 2015 put SSA in the EEE (Exempt-Exempt-Exempt) category. This means that contributions to SSA can be claimed as deductions under Section 80C. Yearly interest income (which is anyways added back to the amount in account) is also tax-free. And finally, the total amount at maturity or withdrawal is also tax-free.
But keeping SSA under the purview of 80C has its drawbacks too. Section 80C in itself has a ceiling of Rs 1.5 lacs and is also used by other investment options like PPF, 5-year FDs, Insurance, etc.
So in all probability, if you do invest a full Rs 1.5 lacs in SSA and also have other investment in PPF, 5-year FDs, you wont be able to get the full benefit. And that is because even though your investments which are eligible for deduction are more than Rs 1.5 lacs, the upper cap of Section 80C will restrict your deductions to just Rs 1.5 lacs.
Can there be partial withdrawals?
As already mentioned in one of the above section, you are allowed to withdraw 50% of the balance amount at the end of the preceding financial year. But this can only be done once the girl has attained the age of 18 years. And since the maximum age at which the account can be opened is 10 years, there is practically a complete lock-in period of 8 years.
Can there be premature closures?
Yes. It’s possible. The account can be closed prematurely as the girl completes 18 years of age, and provided she gets married before the withdrawal.
How is the interest calculated on Sukanya Samriddhi account?
The interest calculation for SSA is similar to that of Public Provident Fund (PPF). The interest is calculated monthly, but added back to the account at the end of year.
The below table illustrates sample calculations for SSA, where a monthly amount of Rs 5000 is deposited. The account is opened when the girl child reaches of the age of 6 years.
As you can see, contribution of Rs 5000 monthly is only made upto the 14th year of account opening. But the overall corpus grows to almost Rs 30.79 lacs at the maturity in 21st year.
Also when the girl child reaches 18 years of age, an amount equal to 50% of preceding year’s balance can be withdrawn. In above example, this amount equals 50% of Rs 12.83 Lacs, i.e. about Rs 6.41 Lacs.
Here is another illustration, which shows the amount accumulated in corpus at the end of 21 years (of account opening), depending on amount of annual investment – from Rs 10,000 to Rs 1.5 Lacs.
Is this the best option available?
I will prefer not to answer this question now and give my views later on in the post. But you need to be understand that if you only consider interest rates for choosing SSA over PPF, then that is not the right thing to do. And its because there are important things like liquidity, lock-ins to compare too. What is the point of saving money if you cannot use it when you need it (lock-in)?
How does it compare with PPF?
Only three documents are required for opening of SSA in girl child’s name. These are mandatorily required and are as follows:
- Birth Certificate of the girl child
- Identity proof of the parent/guardian
- Residence proof of the parent/guardian
You can open SSA in any post office or authorized bank branches.
Other Important Things To Note
- As of now, there is no nomination facility available for this scheme. In the event of girl’s death, the account will be closed and the balance will be paid to the parent/guardian of the account holder.
- The SSA is transferable anywhere in India if there is a need for the same.
- If there are two girls, you can invest Rs 1.5 lacs into each girl’s SSA. But you can only claim tax benefit for a maximum of Rs 1.5 lacs (upper cap of Section 80C)
The very basis on which Sukanya Samriddhi Scheme is based is to provide adequate funds for a girl’s education and marriage. And considering that account can only be opened upto the age of 10 years, its obvious that investment in this scheme is of long term nature (you can only withdraw when girl turns 18). And with this fact in mind that this scheme is to fund long-term goals, a return of 9.2% does seem to be on the lower side, when compared with what well-diversified mutual funds have delivered in the past.
Even in a small study about long-term returns for lump sum investments in mutual funds, it was found that when investment horizon is in excess of 7 or 10 years, it makes sense to invest in mutual funds, almost irrespective of current market levels. And that too in lump sum, if possible. If not, even regular SIP will beat PPF-type returns.
For someone who is adamant on not taking any risk at all, Sukanya Samriddhi Scheme makes a lot of sense. Not everyone is comfortable investing in equity linked schemes and one should respect that fact. A lot of investors prefer guaranteed returns at the cost of earning lower returns. And as a matter of fact, tax-free return of 9.2%, and that too without risk* is not bad at all for a conservative, low risk-appetite person.
* But the risk of lower returns (9.2%), when compared to that offered by equity MFs (12%+) still remains.
While doing research for this post, I came across a post by Prof. Pattabiraman, where he has raised some genuine concerns. I am enlisting a few of them here and you can read the rest in his post:
You are only allowed to withdraw 50% when the girl child reaches the age of 18. But these days, most children complete their schooling by 17 and hence you don’t want most of the money locked at this stage. Education for a girl child is more empowering than marriage and hence money should be easily accessible when it is needed most for education.
In another post about SSA, he mentions few more relevant points:
You are only allowed to invest for 14 years. But what about the rest of time upto 21 years (assuming you opened SSA when the girl child was born)?? At the end of 14thyear, you can’t even start investing in equity as the real money-making power of equity investing can only be seen if you invest for decades, and not when 14 years have already passed.
So what should one do?
I think that if you can bear with volatilities of stock market investing and can really stay on course for 15-20 years, then there is no sense in parking money in Sukanya Samriddhi Account. And that is even after considering the tax benefits. You should start doing SIP in well-diversified Mutual Fund. Period. No need to think about anything else.
But if you feel that you are not very comfortable with mutual funds, then you can choose to split money between PPF and MF. Or between SSA, PPF and MF.
You can do 60-40 split between MF & PPF. Or a 40-30-30 split between MF-PPF-SSA.
I suggest PPF even though its returns are lower (8.7%) because of higher liquidity when compared to SSA. I personally feel that we generally neglect liquidity when it comes to financial planning. But it’s a very important factor. And I quote from Prof’s post in italics below:
After 15 financial years, the full PPF corpus is liquid. The idea is to have full liquidity on the entire corpus when [the girl] is about to enter college. Liquidity is more important than returns. Adequate exposure to equity mutual funds will always offset the small ~1% difference in return between Sukanya Samriddhi Account and PPF.
To be honest, SSA is more of a savings scheme and less of a investment vehicle. And there is a difference between Saving and Investing.
If there is anything more that you would like to know, please do let me know. And if you find some other useful information which I might have missed out, please share the same in comments and I will add it to the main post for benefit of other readers.