Safe harbour for your daughter

Do you want to save up to give your daughter a great education? Investing in equities may be the best bet given that this is a long-term goal.

But if you are a conservative person, you can also consider investing a part of that education portfolio in the Sukanya Samriddhi scheme.

This new savings scheme was recently introduced by the government following an announcement made in the 2014 Budget. The account can be opened in any of the post offices or nationalised banks and a few private banks such as Axis Bank, HDFC bank, IDBI Bank and ICICI Bank.

An account under the Sukanya Samriddhi Scheme can be opened only in the name of a girl child by her parent or guardian. At the time of opening the account, the child needs to be not older than 10 years.

This year alone, there is a concession — the account can be opened even for children who have completed 11 years. A minimum deposit of ₹1,000 is required to open the account. From then on, every year, the account holder needs to deposit a minimum of ₹,1000.

A maximum of ₹1,50,000 can be deposited in any year. Deposits can be made by cash, cheque or demand draft. Deposits have to be made continuously for 14 years from the date of opening of the account and the account will mature on completion of 21 years. But if the child is married before the completion of the 14-years or 21-year deadlines, the account will be closed.

If you do not deposit the minimum prescribed amount in a year, the account will be discontinued. A penalty of ₹50 plus the minimum subscription for the year has to be paid to renew the account.

Premature closure of the account will be allowed only on compassionate grounds. If the account holder is not able to make a contribution to the account, he needs to convey this with reasons in writing and the account will be closed without any penalty.

In the normal course, the Sukanya Samriddhi account will mature on completion of 21 years from the date of opening of the account. The full amount can be withdrawn then.

Partial withdrawal amounting to half the money in the account is allowed when the child turns 18, for funding her education. The account can be closed prematurely if the girl gets married (provided she is 18).

However, withdrawal from the scheme is not compulsory when the account matures after 21 years. You can leave the money in the account. Your daughter can then perhaps use it for other big-ticket expenses later on. The balance will continue to earn interest as specified.

The interest on the deposit is compounded yearly. For 2014-15, the government has notified an interest rate of 9.1 per cent. Interest rates for all small savings schemes are reset on April 1 every financial year, based on yields on government securities in the preceding year.

This scheme is likely to follow this pattern too. The scheme’s launch details say that there will be an income tax concession on the interest paid on this account for this financial year. The tax status of the interest earned in future will be critical to decide on the investment.

The scheme is a good option for conservative investors. Given its 21 year tenure, if you require the entire corpus for her education or marriage, it will be prudent to begin investments at a very early age, so that it matures when she is in her twenties. None of the small savings schemes, except the Senior Citizen’s Scheme (interest of 9.2 per cent), pay out a comparable interest rate today.

But do note that the interest rate is subject to revision every year, just like other small saving schemes of the Government.

Given that interest rates are peaking out and may head lower, interest rates over the next two-three years may be lower too. Though the National Saving Institute says that 80C benefit is likely on the contributions made in to this account, these need to be notified.

If the benefit is given and if interest and maturity proceeds are tax-exempt, this scheme will be better than PPF for those looking to save for a girl child. On comparable products, insurance companies have child plans which invest mainly in debt instruments, cover the parent’s life and offer your child benefits at maturity. But these are high-cost options compared to this product.