Should You Open A Sukanya Samriddhi Yojana Account?

In sync with his 'Beti Bachao, Beti Padhao' campaign, Prime Minister Modi launched the Sukanya Samriddhi Yojana (SSY) Account, a new Financial Instrument in December 2014. There's still a limited amount of awareness about the scheme and its relative merits. If you're confused about whether you must open an SSY account for your beloved daughter, read on.

Features
Backed by the Government of India, the SSY is, needless to say, a very high safety product. Think of it as a high interest savings account with a lengthy lock-in period.

The government fixes the interest rate for SSY accounts from time to time - at present, it stands at 8.6 per cent per annum, computed monthly but compounded annually. What this means is that 0.72 per cent (8.6 per cent divided by 12) of your last months' balance will be accrued as interest each month. At the end of the Financial Year, the total accrued interest will be added to your principal, and the same cycle will start once again.

The account has a maturity period of 21 years from the date of account opening, and can be opened only if your daughter is under 10 years of age as on date. You can make deposits of up to 1.5 lakh per annum (with a minimum amount of Rs. 1000) into this account for a maximum of 14 years from the date of account opening.

For instance, if your daughter is 9 years old today, you can make deposits into this account until she turns 23; and the account will mature when she turns 30. Assuming that you max out your contributions each year by investing Rs. 12,500 per month in your daughter's SSY account for 14 years, you'll have a built a stately corpus of nearly 70 lakh for her by the time she's 30 (assuming that the current rate of 8.6 per cent per annum is sustained, which is unlikely).

Your account can be revived with a nominal penalty fee of Rs. 50, in case it goes dormant due to lack of the minimum specified contribution.

Withdrawals
Up to 50 per cent of the previous year's balance is withdrawable for fulfilling education or marriage expenses, provided that your daughter is over 18. Premature closure is permitted in case of the death of the depositor or on 'compassionate grounds'. Under normal circumstances, the account balance will be available for withdrawal after 21 years.

Variable Interest Rate
The scheme's interest rate started off at 9.1 per cent, and currently stands at 8.6 per cent - a 50 basis point drop within a couple of years. This goes to show that although the scheme has a high degree of principal safety, the variable interest rate can result in significant variability in the final corpus amount.

Assuming an average interest rate of 8 per cent throughout the life of your investment in this account, you'll end up saving Rs. 65 lakh if you max out your monthly contributions. Had the rate stayed steady at 9.1 per cent, the final amount would have been 76 lakh. Quite a swing!

This variability of interest rate is quite possibly the biggest drawback of SSY. With efforts to rein in inflation under way, we could see further rate cuts over time. These rate cuts will be passed onto SSY and other GoI schemes quickly.

Taxation
SSY is E-E-E - meaning that the invested amount is deductible under section 80C, the interest is tax exempt, and the maturity value is tax exempt as well.

The final verdict
Go for it! The tax efficiency, principal safety and long term compounding benefits makes SSY a far superior investment when compared with fixed deposits and traditional insurance policies. Better still, couple it 50:50 with an equity mutual fund SIP which has the potential for higher long term returns. Throw in a simple, low cost term insurance plan too. That way, you'll be achieving an excellent balance between growth, principal safety and the protection of your daughter's future goals.

How to Invest
Most PSU banks and some private sector banks (ICICI and Axis) offer an SSY account. At present, there are 28 participating banks, with more expected to be added over time. The documentation is simple and doesn't entail wading through mountains of paperwork. All you need is your daughter's birth certificate,and your ID and address proofs, and you're good to go.