The Sukanya Samriddhi Yojana is the highest tax-free returns investment, at 8.5 percent (2018), that comes with government backing in India. It comes with an EEE tax status, which means tax is exempt on deposits made, interest earned and maturity amount. One can claim exemption on these deposits under section 80C of the Income Tax Act. The scheme can easily be opted for at a post office or a bank.
While these factors make it attractive, one needs to analyse the implications of it on one's financial goals and the economic needs of the girl child, as they would with any other investment.
Basics of Sukanya Samriddhi Yojana
- An account under the SSY can only be opened for a girl child aged between 0 to 10 years.
- Only one account be opened under the name of the girl child.
- Only two SSY accounts can be opened per family for two girls.
- The girl child receives access to the SSY account on attaining 10 years of age. The parents, as well as the child, can contribute to the account.
- The minimum deposit to keep the SSY account active was reduced to Rs 250 a year. The maximum deposit is limited to Rs 1.5 lakh.
Points to consider
Here are a few important points to consider with regard to an SSY account:
- Make the deposit before the 10th of the month to earn interest for the month's deposit.
- Premature closure of the account is only allowed after completing five years from the date of opening an SSY account. Further, the closure is only allowed in rare cases, for example, to fund medical treatment of a life-threatening disease.
- If a premature closure is requested for any other reason than the ones allowed by the rules, the deposit will only earn interest as that of a Post Office Savings Bank Account (currently 4 percent per annum).
- Deposits will need to be made for a minimum of 15 years to keep the account active. With the strict partial and full withdrawal rules, think of it as a long term investment with much need commitment.
- The account will run for 21 years irrespective of the girl's age.
- With a minimum of 15 years investment required, the age of the girl child becomes important. For example, if the account has been opened for a 9-year-old girl, the deposits will have to be made till she is 24 years old and the account will continue earning interest till she turns 30 years old, not making it very useful to fund her education.
- The age is also important to make premature withdrawals. When the girl turns 18 years old, a maximum of 50 percent of the account balance from the preceding year can be withdrawn for the purpose of higher education of the girl. A written application along with proof of admission to an educational institution is also required. Further, the withdrawal limit is restricted to the fee amount as mentioned in the slip issued by the institution.
- Premature withdrawal is also allowed for the girl's marriage if the parents confirm through a written affidavit that she is not below 18 years of age on the date of marriage.
- As seen above, the closure or premature withdrawal of the account are subject to strict conditions so that the scheme is not misused and specially designed to help a girl child.
Look at alternatives
At any given time, the rules state that the SSY scheme will fetch an annual interest rate higher than PPF (public provident fund), that is also reset every year based on the government security yields.
While the scheme comes with tax and security benefits, one needs to ascertain the amount required for the girl child's education and marriage considering inflation. The parent could start investing in other higher yielding instruments like equity-linked mutual funds besides the SSY account.
An instrument that allows better flexibility could help fund any emergency education or personal needs that could arise before maturity.