Sukanya Samridhhi Yojana: How beneficial is the holistic tax benefit that SSY provides?

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Published: December 6, 2019 1:48:41 PM

Sukanya Samridhhi Yojana (SSY) is considered as the safest investment option for a girl child to accumulate funds for her higher education and marriage.

Sukanya Samridhhi Yojana, SSY, safest investment option, girl child, funds for higher education, fund for marriage, Public Provident Fund, PPF, Income Tax Act, 80C benefit, EPF, GPF, CPF, NPS, ELSS, NSC, insurance premium, FDFor risk-averse guardians of girls, SSY is the best option to invest in.

Sukanya Samridhhi Yojana (SSY) is considered as the safest investment option for a girl child to accumulate funds for her higher education and marriage. This is because SSY is a government scheme and hence the capital employed as well as the returns enjoy sovereign guarantee. Moreover, the rate of return on capital investments in SSY account is even higher than the rate of return in Public Provident Fund (PPF) account.

So, for risk-averse guardians of girls, SSY is the best option to invest in.

The investments made in SSY accounts are eligible for tax benefits u/s 80C of the Income Tax Act and even the interests earned and maturity values are also tax free, that makes SSY an Exempt, Exempt, Exempt (EEE) category of investment.

However, the question is how much beneficial is the holistic tax exemption for the guardian of a girl child or for the girl?

Tax benefit on investment

The tax benefit given on the investment made in SSY account is u/s 80C of the Income Tax Act, which also includes tax benefits on mandatory contribution to EPF/GPF/CPF/NPS, voluntary contribution to PPF/ELSS/NSC, payment for life insurance premium, investments in 5-year FD, payment of tution fee for education of children, repayment of home loan principal, payment of stamp duty and registration charges on purchase of house, etc.

As the overall deduction limit u/s 80C is Rs 1.5 lakh currently in a financial year, there may be very little of no scope available to get any additional benefit on SSY contributions.

Benefit of tax-free interest

Although accounts are opened and contributions are made by the guardian of a girl child, but ownership of the account remained with the girl, who may operate the account herself after attaining the age of 10 years. So, the interest earned in the SSY account also belongs to the girl child, who normally won’t have taxable income and needn’t pay any tax. So, even if the interest earned on SSY is made taxable, nobody would be liable to pay the tax.

Benefit of tax-free maturity

Partial withdrawal – up to 50 per cent of the current account balance – may be made by the beneficiary girl child on attaining the age of 18 years for her higher education. Assuming that the guardian invested Rs 1.5 lakh at the beginning of every financial year for the entire 15-year investment period, the total account balance at the end of 18th year, at the current interest rate of 8.4 per cent, would be Rs 58,01,751. At this point, the girl may withdraw 50 per cent of the amount or Rs 29,00,875 for her higher education. If half of the investments made in 15 years (i.e. 50 per cent of Rs 1,50,000×15), is deducted as cost of investment, the gain amount will be Rs 17,75,875. Considering that the girl has no other income, at the current income tax rate, the tax payable would be Rs 3,45,263, which she needn’t pay as the maturity withdrawals from SSY accounts are tax free.

Similarly, if the next withdrawal is made as full and final withdrawal at the end of 21st year, the remaining maturity value at that time would be Rs 36,95,023, assuming that the current interest rate of 8.4 per cent continues to be same throughout the investment period. After deducting the remaining 50 per cent of the amount invested i.e. Rs 11,25,000, the gain amount would be Rs 25,70,023 and, considering that there is no other income, as per current income tax rates, the tax payable would be Rs 5,83,507. However, the girl don’t have to pay any tax as the maturity withdrawals from SSY accounts are tax free.

So, in the above situation, where partial withdrawal of 50 per cent is made at the end of 18th year and rest of the maturity value is withdrawn at the end of 21st year, total tax of Rs 9,28,770, which otherwise would have been payable, would be saved because of the tax-free nature of the maturity withdrawals from the SSY accounts.

Similarly, if the girl doesn’t make any partial withdrawals and withdraws the entire maturity amount of Rs 73,90,043 at the end of 21st year, the total gain would be Rs 51,40,043 after deducting the total nvestment amounts of Rs 22,50,000. In this case the girl would save Rs 13,54,514, which she otherwise would end up paying as tax on the gain amount, if there were no tax incentives.

So, while the tax incentives on investments and interest earned may of little benefits, but the tax-free withdrawals on maturity would benefit the girl considerably, provided adequate and timely investments are made in the SSY account.

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