Thinking of investing in the PPF and fixed
deposits for your little daughter's education or marriage? The Sukanya
Samriddhi Yojana (SSY) could be a better alternative. The scheme, which was
launched in January as part of the Prime Minister's Beti Bachao Beti Padhao
initiative, was already eligible for deduction under Section 80C. The Budget
has now made the income from the scheme tax free.
The SSY is more attractive than the PPF because it offers a higher interest rate. The interest rate of the SSY is also linked to the government bond yield. While the PPF offers 25 basis points higher than the yield of 10-year government bonds, the SSY will offer 75 basis points higher than the 10-year government bond yield for the previous year (which was 8.33% for 1 April, 2013 to 31 March, 2014). For 2014-15, the interest for PPF is 8.7% while the SSY offers 9.1%. Though the SSY is an attractive proposition, the scheme is not open to everybody. An SSY account can be opened by the parent or guardian in the name of a girl child not more than 10 years old. Only for this year, the government has offered a grace period of one year and allowed accounts to be opened for girls who will be 11 years old by 1 December 2015. Children born before 2 December 2003 are not eligible.
How to open an SSY account
Accounts can be opened in any post office or designated
branches of PSU banks with a minimum investment of Rs 1,000. The maximum
investment in a financial year is Rs 1.5 lakh and deposits can be made for 14
years after opening the account. A parent can open an account for a maximum of
two daughters, but the combined investment in the two accounts cannot exceed Rs
1.5 lakh a year. The account matures when the girl turns 21, though up to 50%
of the corpus can be withdrawn after she is 18 or gets married.
Should you invest?
Financial planner Malhar Majumder believes the
girl child tag lends a sense of purpose to the investment. "You invest in
the PPF for 15 years and then do as you please with the maturity amount. Some
buy a house while others spend on children's marriage or education. The
instrument itself does not offer a goal, Rs he says. On the other hand, the SSY
nudges a parent to save for specific goals—the daughter's education and marriage.
But experts also doubt if the government will be able to monitor the usage
of the funds.
However, since this is a debt based scheme,
the SSY won't be able to generate very high returns. If a couple starts putting
away Rs 1.5 lakh a year in the SSY when the child is 10, the corpus would grow
to Rs 28.89 lakh in 11 years, by the time she is 21. If the girl is 5 years old
and they save for 14 years, the investment would grow to Rs 42.88 lakh by the
time she is 19.
This might appear attractive by today's
standards but it will not be enough to pay her college fees in the year 2031.
The interest rate too would not be as high as it is right now. This is why
experts advise that the SSY should be used in combination with other
investments, such as equity funds, for saving for a child's future goals.
"A foreign degree can easily cost upwards of Rs 25 lakh at today's
prices,Rs says financial planner Suresh Sadagopan.
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