SSY: Attractive scheme for girl child, provided you don't mind lock-in

The outstanding balance in the Sukanya Samriddhi Yojana (SSY) grew from Rs 77,472 crore in February 2023 to Rs 1 lakh crore in February 2024, according to data from the Reserve Bank of India. SSY registered a 41 per cent growth, the highest among all small savings instruments.

Key features

SSY is a government-backed, fixed-income scheme. “It is designed to help parents accumulate funds for daughters’ education and wedding,” says Arnav Pandya, founder of Moneyeduschool.

It offers an interest rate of 8.2 per cent per annum. It is an EEE (exempt-exempt-exempt) product: contributions are tax-deductible (under Section 80C), interest earned is tax-free, and maturity proceeds are exempt from taxation.

An account can be opened for a girl child below 10 years of age. It matures 21 years from the end of the financial year in which it was opened.

Accounts can be opened for up to two daughters (three if the second and third are twins). A maximum of Rs 1.5 lakh can be invested per child in each financial year.

Attractive tax-free return

SSY offers the highest interest among all small savings schemes. The interest, moreover, is tax-free. While the Senior Citizens Savings Scheme also offers 8.2 per cent, its interest is taxable. Currently, SSY pays 1.1 percentage points (110 basis points) more than the Public Provident Fund (PPF), which offers 7.1 per cent.

SSY is free from market risk. “Since it is government-backed, it is virtually a risk-free investment,” says Arvind A Rao, founder, Arvind Rao and Associates.

Its strict lock-in ensures money is saved for the girl’s education or wedding. “This makes it ideal for investors who struggle to save for long-term goals,” says Rao.

Liquidity issues

SSY allows early closure if the girl reaches 18 and is getting married.  Partial withdrawal is allowed after she turns 18 or completes the 10th standard. However, partial withdrawals are capped at 50 per cent of the balance at the end of the previous financial year. “If more funds are needed for class XII or undergraduate education, this limit can be restrictive,” says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi) registered investment advisor.

Rao adds that those uncomfortable with long lock-ins may find SSY less appealing.

While SSY’s 8.2 per cent interest is attractive, equities offer the potential for higher long-term returns. “Historical data suggests equity markets can yield high double-digit returns over two decades or more,” says Rao.

Unlike PPF, which allows an indefinite number of extensions in five-year blocks, SSY must be closed after 21 years. “This flexibility makes PPF attractive for long-term wealth accumulation,” says Raghaw.

Contributions to SSY can only be made for 15 out of its 21-year tenure. “Also, the annual investment is restricted to Rs 1.5 lakh,” says Pandya.

Practical issues

SSY accounts can only be opened for resident girls. Change in residency status must be reported to the bank or post office within one month. If this is not done, the account is deemed closed from the date of change and no interest is credited thereafter.

Closing the account before moving abroad can be challenging since the account holder is still a resident. And once her residency status changes, it may become difficult to visit the branch to close the account. “If you plan to move abroad soon, think twice before opening an SSY account, or limit your contributions,” says Raghaw.

SSY vs PPF: A detailed comparison

Similarities

·       Both enjoy EEE (exempt-exempt-exempt) tax treatment

·       Both are long-term, fixed-income products; both are risk-free, backed by the government

·       Interest rates for both are reset quarterly by the government  

Differences

·       SSY can be opened for girl child below age 10 while PPF is available to all

·       SSY offers a higher rate of 8.2 per cent, while PPF offers 7.1 per cent

·       SSY matures in 21 years without an extension option; PPF matures in 15 years but can be extended indefinitely in five-year blocks

Advice

·       In a family of three (with one minor child), maximise investments to Rs 6 lakh by investing in both