Sukanya Samriddhi Scheme: Not too good for investment

Pankaaj Maalde

Post-Budget, two investment options are being talked about due to tax benefit available in the schemes. One is New Pension System (NPS) and another ‘Sukanya Samrridhi Scheme’ (SSS). NPS is given additional tax deduction of Rs 50,000 under a new section whereas new scheme ‘Sukanya Samrridhi Scheme’ is included in the list of investment options available to claim deduction u/s 80C. Most of the experts have commented like that it’s one of the best in the category; I beg to differ on this for the reasons laid down hereunder. There is no doubt that the scheme is good but it is not too good that every investor must jump into it without understanding the pros and cons.

No separate rebate u/s 80c

First and the most important is that the scheme is included in the list of investment u/s 80C and there is no separate deduction available like in NPS or Rajiv Gandhi Savings Scheme. Taxpayers already have exposure to few of the investments such as EPF and life insurance plans and also might have outgoing in the form of home loan or children’s education. So it is most likely that investors will not benefit much from the scheme due to prior commitments.

Limit is for two daughters

Again, the limit of Rs 1.50 lakh is not per child and it’s for two girls born after December 2, 2003. So again if you have some pending amount of investment for tax benefit, you need to divide the amount among two daughters. If the government is so serious about the Beti Bacho Beti Padhao, then they should have given separate deduction by inserting new section and also limit should have been given per child.

Rate is not assured for full term

The higher rate of interest of 9.10% is for the current financial year which is likely to change every year. The rate of interest will be decided for each financial year in the month of respective April month. The good part is that interest is linked to 10-year G-Sec like PPF. The rate of 10-year G-Sec at present is around 8.70% currently and thus it is giving 0.40% higher but there is no guarantee in future that this will always remain high. Secondly, we are witnessing lower inflation and most of the experts believe that repo rate will fall further, so the chances of SSS return coming down is also higher.

Long lock-in period

The scheme has long lock-in period of 14 years. It means no withdrawal is allowed in the first 14 years or till the girl child reaches the age of 18 years.

Every investment has to be assessed on three parameters — risk, reward and liquidity. The higher rate of interest is possible because of long lock-in period in the scheme. Unlike PPF in which the withdrawal is allowed after 7th year, you can’t touch the money in SSS for 14 years if you open an account for a girl child who is less than four years. A taxpayer has to keep in mind that higher rate of interest of around 0.40% is given with additional seven years lock-in period which may be seriously looked into before investing in the scheme.

No deposit possible after 14 years

The scheme does not allow you to deposit once the first 14 years are over which is again a likely problem in future. The deposit is very much possible in PPF after the completion of first 15 years in a block of 5 years. Today, it may be difficult for you to finalise the corpus for future needs but suppose you need higher amount for your daughter’s wedding or higher education then you have to find out other scheme whose interest is tax-free and also beats inflation which may not be easy at that time.

You need equity exposure for long term

Asset allocation plays a major role in deciding your returns over a period of time. Your portfolio returns depends more on asset allocation than investment options. The Sukanya Samrridhi Scheme is purely a debt scheme and the rate of interest undoubtedly high compared to other fixed avenues. The return is also tax-free but the scheme will not beat the real inflation by margin. As a financial planner, I always recommend taking higher risk when your goal is of long-term horizon. The period of 14 years is really a long-term horizon to take some extra risk to generate higher return compared to fixed interest avenues. The average return on Nifty in the past 10 years is 15% p.a. and good performing equity mutual fund schemes have given 3 to 5% more over Nifty return.

You will be surprised to know the final figures of both at the end of 14 years if we assume the return of 9.10% p.a. in SSS and 15% p.a in equity. If you deposit Rs 1.50 lakh every year in SSS @ 9.10% p.a. then you will be able to generate a corpus of around Rs 40 lakh. If you take higher risk and invest the same amount of Rs 1.5 lakh yearly (preferably via monthly SIP) in an equity scheme of mutual fund @15% p.a. you will generate a corpus of Rs 60 lakh. The difference is 50%. The returns are not guaranteed but by going the past performance it is possible.

To conclude, the scheme is very good compared to traditional plans of life insurance as life insurance products are likely to give half the return as compared to SSS. It is very much comparable with PPF but PPF has an edge because of liquidity and further deposit after initial period is over. To me, the scheme is not good compared to equity mutual fund schemes (ELSS scheme for tax purpose) looking at long-term time horizon.

The author is a certified financial planner. The views expressed in this article are his own