Face-Off. Sukanya Samriddhi scores over PPF

Last week, the Sukanya Samriddhi Scheme — the recently launched savings scheme for girl children — got sweeter. The interest rate on deposits in the scheme was raised to 9.2 per cent for 2015-16, up from 9.1 per cent for 2014-15. This was icing on the cake for the scheme, which had got a boost in the recent Budget. Investment in the account was eligible for tax deduction under Section 80C. But there was confusion whether interest earned on the account and the maturity amount were exempt from tax.

The Budget cleared the air by making all payments, including interest, under the scheme exempt from tax.

This places the Sukanya Samriddhi Scheme in the exalted EEE (exempt-exempt-exempt) category of investments, at par with options such as the Public Provident Fund (PPF).

Also, the Sukanya Samriddhi Scheme and the PPF are as safe as they get — they are regular interest-earning, fixed income schemes that are backed by the Government. The PPF has been among the most favoured options of conservative investors to build their long-term corpus. The Sukanya Samriddhi Scheme should also ride up the popularity charts for those looking to accumulate for their girl child. So, which is better — the PPF or the Sukanya Samriddhi Scheme?

Purely on returns, the Sukanya Samriddhi Scheme (9.2 per cent this year) is better than the PPF, which continues to earn 8.7 per cent, the same as last year. Note that these rates are are linked to the yield on Government securities and may change every year. Still, the Sukanya Samriddhi Scheme should maintain its 0.4-0.5 percentage points lead over the PPF.

This can mean a big difference in the long run. Say the rates on the Sukanya Samriddhi Scheme and the PPF remain at 9.2 per cent and 8.7 per cent, and each year, the maximum allowed investment of ₹1,50,000 is deployed in both these instruments. After 14 years of deposits and holding for the remaining period till 21 years from the account opening — as per the terms of the Sukanya Samriddhi Scheme — the PPF will give you a corpus of ₹74.4 lakh, about ₹5.6 lakh less than what the Sukanya Samriddhi Scheme will give (₹80 lakh).

But the Sukanya Samriddhi Scheme is not for everyone. Only parents or guardians of girl children aged 10 years or less can open this account in the name of the girl child. The account is essentially meant to secure the future of young girl children.

There is no such restriction in a PPF account - it can be opened by anyone who seeks to build a tidy corpus.

One can even open a PPF account in the name of a minor child (both boys and girls aged less than 18 years), but the maximum amount that can be deployed across accounts in a year is ₹1,50,000.

The PPF is more flexible too. It runs for 15 years and can be extended thereafter in blocks of five years. Additional sums can be deposited in these extended periods. On the other hand, in the Sukanya Samridhi Scheme, deposits are allowed only for 14 years from the account opening. Thereafter, you hold the account further until 21 years are completed; you can choose to hold even further too. While interest will accrue in the periods after 14 years from the account opening, additional deposits are not allowed beyond the 14-year limit. Also, the account closes when the girl child gets married after she is 18.

Liquidity is also better in the PPF. Partial withdrawal is allowed after five financial years from account opening. Loans, up to a specified extent, can also be taken against the PPF balance between the 3{+r}{+d} and 6{+t}{+h} financial year from the year in which the account was opened. Under the Sukanya Samriddhi Scheme, there is no scope for taking loans. Withdrawals are not allowed until the child turns 18.

After this, 50 per cent of the balance in the account at the end of the preceding financial year can be withdrawn to fund her higher education. The Sukanya Samriddhi Scheme beats the PPF on returns, but the latter scores on flexibility, liquidity and its ability to serve a wider target group. If you are the parent or guardian of a girl child and can stay invested for the long-term, the Sukanya Samriddhi Scheme may work best for you. Else, the PPF is a good alternative.