There are talks going on two investment options post budget due to tax benefit available in the schemes. One is NPS and other is ''Sukanya Samridhi Scheme''. NPS is given additional tax deduction of Rs. 50,000 under new section whereas new scheme launched ''Sukanya Samridhi Scheme'' is included in the list of investment options available to claim deduction u/s 80-C. I want to highlight few points in the SSS so that an investor can take informed decision before opening an account. Most of the experts have commented like that its one of the best in the category; I beg to differ on this for the reasons laid down hereunder. There is no doubt the scheme is good but it is not too good that every investor must jump into it without understanding the pros and cons.

1) Limit under overall limit u/s 80-C

First and most important is the scheme is included in the list of investment u/s 80-C and there is no separate deduction available like in NPS or Rajiv Gandhi Savings Scheme. Tax payers already have exposure to few of the investment like 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.

2) The limit is for two girl child:

Again the limit of Rs. 1.50 lakhs is not per child and it's for 2 girl child born after  Dec.02, 2003. So again if you have some pending amount of investment for tax benefit you need to divide the amount amongst two daughters. If 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.

3) The 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 GSec like PPF. The rate of 10 year Gsec at present is around 8.70% currently and thus giving 0.40% higher in SSS but there is no guarantee in future also this will remain high always. 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.

4) Long lock in period:

The scheme has long in period of 14 years means no withdrawal is allowed in first 14 years or till girl child reaches 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 girl child who is less than 4 years.  Tax payer has to keep in mind that higher rate of interest  of around 0.40% is given with additional 7years lock in period which may be seriously looked into before investing in the scheme.

5) No deposit possible after 14 years.

The scheme does not allow you to deposit once the first fourteen years are over which is again a likely problem in future. The deposit is very much possible in PPF after completion of first 15 years in a blog 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.

6) 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 more depends on asset allocation than investment options. The Sukanya Samridhi Scheme is purely a debt scheme and the rate of interest undoubtedly high compared to other fixed avenues. The return is also tax free which also a good part of the scheme, 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 very long term.  The period of 14 years is really a long term time horizon to take some extra risk to generate higher return compared to fixed interest avenues. The average return on nifty in last ten years is 15% p.a. and good performing equity mutual fund schemes have given more 3 to 5% over nifty return.

You will surprise 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. 1.50lakhs every year in SSS @ 9.10% p.a. then you will be able to generate corpus of around Rs. 40lakhs. If you take higher risk and invest the same amount of Rs. 1.50lakhs yearly (preferably via monthly SIP) in equity scheme of mutual fund @15% p.a. you will generate corpus of Rs. 60lakhs. 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 of SSS. It is very much comparable with PPF and PPF has an edge because of liquidity and further deposit after initial period is over. To me scheme is not good compared to equity mutual fund schemes (ELSS scheme for tax purpose) looking at long term time horizon. You have to be very careful before investing for tax planning as every investment has its own merits and demerits. You need to finalise your investment based on your risk profile and over all asset allocation.

(By Pankaaj Maalde, certified financial planner)