As there is a cap on maximum investment per year in Sukanya Samriddhi Yojana, a person, who wants to invest more, may consider investing in insurance or FDs or other plans like PPF and MF.
There are many investment products available to accumulate corpus to fund the study, career and/or marriage of your daughter. Three of the products are Sukanya Samridhhi Yojana, insurance plans and bank fixed deposits. Here are some features and tax benefits of the three.
Sukanya Samridhhi Yojana (SSY)
Sukanya Samridhhi Yojana (SSY) is a tailor-made product for girls, under which a legal guardian or natural guardian may open an account either in Post Office or in a commercial bank for a girl child till she becomes 10 years old by producing the birth certificate of the child. An SSY account is opened for 21 years and minimum Rs 250 and maximum Rs 1,50,000 may be deposited in an account each financial year for 15 years.
SSY gives you tax deductions u/s 80C on the amount you invest per financial year, as well as tax-free interest and tax-free maturity. So, apart from having sovereign guarantee of the Government of India the product falls in exempt, exempt, exempt (EEE) category and is completely tax free.
While partial withdrawals, up to 50 per cent of balance standing at the end of the preceding financial year, are allowed after the account holder attains age of 18 years, a normal premature closure is also allowed after that but just one month before or three months after your daughter’s marriage.
As there is a cap on maximum investment per year in SSY, which is Rs 1,50,000, a person, who wants to invest more, may consider investing in insurance or FDs or other plans like PPF and MF.
Insurance plans are also fall in exempt, exempt, exempt (EEE) category and hence are very tax effective. There are also many child insurance products available in the market in the form of money back plans or regular plans, but to get the tax benefits, you should be careful that the sum assured of the plan you are taking must be at least 10 times or more than the amount of yearly premium. So, if you take a single-premium child plan, you will neither get any tax deductions on the premium paid and nor will the maturity amount be tax free.
Although, one of the important feature of child insurance is the premium waiver benefit (PWB), but there is no point in taking insurance on child’s life. As it is not the motive of child insurance to get lump sum money in case of death of the insured child, it’s better to take insurance on your life, making daughter the nominee. So, you may consider taking a term insurance plan along with SSY and other investments, or a unit-linked insurance plan (ULIP) to fetch the market returns along with insurance cover. Some high-risk insurance plans with higher cover in case of death of policy holder along with PWB may also be considered, as PWB will allow the insurance to continue even without paying premium even after getting the death claim.
Bank fixed deposits (FD)
Bank FDs are far more liquid than SSY or insurance, but it may prove rather disadvantageous in your effort to accumulate the fund required at the time of higher education or marriage of your daughter. On the other hand, the funds locked in the SSY or insurance would turn out to be blessings in disguise for you, provided you continue to invest.
Unlike, SSY and insurance, where the returns are tax free, the return on FD will depend upon in which tax bracket the investor falls. For example, effective return on a FD offering 10 per cent interest will become 7 per cent for a person falling in 30 per cent tax bracket, 8 per cent for a person in 20 per cent tax bracket and 9 per cent for the person who is in 10 per cent bracket. Moreover, unlike SSY and insurance, where the investment amounts are eligible for tax deductions u/s 80C, no such benefits are available on investments in bank FDs.
Although FD rates have shown signs of revival, but they are still lower than the rate offered by SSY. Moreover, the rate on SSY has also been hiked as the FD rate increase, keeping the gap intact.