Sukanya scheme attractive even without tax benefit

Many hurdles that investors could have faced after enrolling for the scheme have been removed.

The government has announced several changes for those who want to invest in the Sukanya Samriddhi Yojana (SSY) this financial year.

Now, an account can be opened for an adopted daughter. And, only a girl child residing in India can be a beneficiary.

Premature closure of an account, in case of a medical emergency, has been made easier. Deposits can be made till a girl turns 15.

While there have been many investor–friendly changes, the scheme has been affected by the finance ministry’s move to introduce market-linked interest rates in small savings schemes.

Last financial year, investment in SSY fetched 9.1 per cent return. The government said it would amend the rates on a quarterly basis. For the April to June quarter, the interest rate is 8.6 per cent. 

“The changes not only ensure procedural efficiencies but also consider financial security of the girl child,” says Divya Baweja, partner at Deloitte Haskins & Sells.

The scheme makes sense for many investors, even if it doesn’t bring them tax benefit. Investors can avail deductions under Section 80C on investments in SSY.

However, many investors exhaust the Rs 1.5 lakh limit with their employee provident fund, home loan or tuition fee.

“Despite this, the scheme makes sense for individuals as the returns are attractive and it is tax-free on maturity,” says Suresh Sadagopan, a certified financial planner.

With 50 basis point higher returns than the public provident fund, the scheme is at par with the Senior Citizen Savings Scheme.

It also follows Exempt-Exempt-Exempt tax regime. On maturity, the money goes to the account holder, the girl child, and clubbing of income doesn’t apply.

This means, there’s no tax on investment, accrual or withdrawal.

For example, if an individual in the highest income tax bracket invests Rs 1.5 lakh at one go during the current quarter and locks the interest rate at 8.6 per cent for this financial year, he or she gains effective post-tax returns of 8.6 per cent for the year, if he doesn’t claim tax benefit.

For him to get similar returns from a fixed deposit, the instrument needs to offer 11.6 per cent interest.

Since the interest rates would change every quarter, a person should not make the investment choice based only on returns, according to Malhar Majumder, a certified financial planner.

“It’s not the best child savings plan available in the market. There are mutual funds for this purpose with better returns than SSY. With a proven track record, these (alternative investments) can be used for both boys and girls,” Majumder says.

The government scheme works well for those who wish to maintain segregation of funds and are conservative investors.

Individuals can use it as part of debt investment in overall financial planning for a girl child.

Many small procedural changes in the new rules also make life easier for the investors, according to Archit Gupta, chief executive officer and founder of ClearTax.in.

The guardian needs to deposit minimum Rs 1,000 a year to keep the account operational.

If the condition is not met, the account will be treated as ‘account in default’ and can be regularised on payment Rs 50 penalty for each year.

The government has also clarified that payment for the account can also be made through electronic mode. Earlier, payment was allowed only through cash or cheque. SSY can now be transferred from a bank to post office and vice versa.

The guardian or the account holder has to furnish proof of shifting of residence.

Even if you are not relocating, you can transfer the account by paying a fee of Rs 100 to the post or to the bank to which the transfer is being made.