Jul 282016

SSY Remains Attractive

Ever since Modi government launched one of its flagship schemes known as the Sukanya Samriddhi Yojana, a number of changes have been implemented in phases. Despite all those changes, everyone has been eyeing on one factor – what are the tax benefits that can enjoy? Well, this is a critical side of any investment and every investor thinks of this. Nonetheless, not many have actually considered the fact that even if the tax benefits are taken out of equation, the Sukanya Samriddhi Yojana still remains attractive. Exactly how does that happen? We will find out shortly but before that let’s take a look at the most recent changes that have been implemented in the Yojana.

Changes made in Sukanya Samriddhi Yojana

  • If a couple has an adopted daughter, an account can still be opened.
  • A girl can be a beneficiary only and only if the child is an Indian citizen.
  • It is now far easier to close the account prematurely if a medical emergency arises. The most important change of Sukanya Samriddhi Yojana

The aforementioned changes only made the Sukanya Scheme very user-friendly. However, they aren’t the most important changes. The most important change is the introduction of market-linked rates of interest. The Finance Ministry of the current government decided to allow market-linked rates of interest for all small savings schemes operational in India.

As far as the historical performance of the interest rates is considered, the Sukanya Scheme enjoyed 9.1% interest in previous financial year. As of this financial year, the April-June quarter is giving 8.6% interest. Why quarter? That’s because the government has decided to change the rates based on market rates of interest every quarter.

These changes, according to Deloitte Haskins & Sells partner Divya Baweja, improve and maintain procedural efficiency of the scheme while at the same time ensuring that a girl child enjoys her financial security.

What about the taxation part we spoke in opening paragraph?

Okay, here is that part that you have been waiting for. How come taking tax benefits out of the equation still keeps Sukanya Samriddhi Scheme still attractive? For this, we need to look up at the high tax bracket people. The maximum investment for which tax exemption is allowed by 80C of IT law is INR 1.5 lakhs. Most people actually end up spending/investing that money in PPF. Some even enjoy deductions on tuition fees and home loans. So, investments in SSY may not be tax-free. But no one should forget that SSY falls in EEE category of investments. EEE means Exempt-Exempt-Exempt. This means that when withdrawals are made, no tax deductions are made. There are no taxes on interest earning during the term of the Sukanya account. So, even if someone fails to enjoy tax exemption during investment in Sukanya Scheme, he or she will still enjoy tax benefits on interest earnings as well as during withdrawal, says, certified financial planner, Mr. Suresh Sadagopan.

Considering the returns that Sukanya Scheme enjoys, the investors will always be on the winning side. As of now the returns on SSY are better that PPF by 50 basis points. This means that Sukanya Scheme is same as Senior Citizens Savings Scheme when it comes to returns. So, higher returns mean higher interest earnings during the tenure of the scheme. These earnings are tax-free by EEE rule. Eventually, when withdrawals are made, the total amount goes to the girl child instead of the withdrawal amount being clubbed to the total income of the investor (parent or legal guardian). This means that the investor actually never sees a growth in his gross income when Sukanya account reaches maturity and withdrawals are made and hence, he or she is not required to pay additional income tax.

In the beginning of this section we said that we will look up at a person who is in higher tax bracket. Let us assume that the person invests 1.5 lakhs in PPF and then another 1.5 lakhs in SSY in current April-June quarter and locks in 8.6% interest. Since he already has 1.5 lakhs in PPF investment, he will not enjoy tax benefits in SSY. However, he will continue to enjoy 8.6% returns that are absolutely tax-free.

Now, what if he did not invest in SSY and instead invested in a fixed deposit. To get the net return of 8.6%, the fixed deposit scheme he chooses should offer at least 11.6% return because fixed deposits withdrawals are taxed. Unfortunately fixed deposits do not offer 11.6% returns. They usually stay within the range of 8.0% to 9.0% and on top of that withdrawals will be taxed! So, SSY investment is better even if investment in SSY is not enjoying tax exemption.

Since SSY interest changes quarterly, is investment a wise option?

That’s one hell of a brilliant question you asked! This question is answered by certified financial planner, Mr. Malhar Majumder. According Mr. Majumder, investment decision is SSY is usually based on the returns offered. Unfortunately, SSY revises interest rates every quarter and hence, returns may not remain the same over the entire year. According to Mr. Majumder, compared to Sukanya scheme there are better alternatives. For example, Mutual Funds. He says that Mutual funds have a history of good performance and they offer better returns compared to SSY. On top of that Mutual funds allow investments for both a female child and a male child while the SSY is designed only and only for a girl child. He says that SSY should not be the only investment for securing the financial future of a girl. In fact, it should be considered as a debt instrument part for designing a foolproof plan for the financial security of a girl child. Finally, Mr. Majumder says that Sukanya Samriddhi Yojana is good if a person is conservative by nature when it comes to investing money and also if he or she prefers funds’ segregation.

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