SSY v/s Tax Saving FD

While most investors are wondering whether to invest in Sukanya Samriddhi Scheme, or Public Provident Fund, some investors might find themselves wondering how SSY compares to Tax Saving FD.

Since the deposit made under both SSY and tax saving FD qualifies for exemption u/s 80C, investors are forced to choose where they want to invest their money. To help you with your decision making, I have compared the SSY against Tax saving FD and presented the comparison in a table below. I hope this table will help you with your decision making process.

I have mentioned my opinion underneath the table.

Features

Sukanya Samriddhi Scheme (SSY)

Tax Saving Fixed Deposit(FD)

Difference between the Schemes

Eligibility Only for girl child aged 10 years or younger For every citizen of India, irrespective of age, and gender
Rate of Interest Currently – 8.4% (April – June 2017)

Linked to 10 year Government Bond Yield. Rate will be 0.75% higher than the bond yield

Every bank decides its own rate for this FD scheme.

Example:- Currently SBI offers 6.8% on tax saving FD.

Investment amount Minimum Rs 1000/- p.a

Further in multiples of Rs 100/-

Maximum Rs 1,50,000/- p.a

Minimum Rs 100/- p.a

Further in multiples of Rs 100/-

Maximum Rs 1,50,000/- p.a

Lock-In Period 21 years after opening of the account. 5 year from the date of opening the FD.
Investment Period 15 years, every year you need to invest Rs 1000/- atleast. Once only, when you open the FD.
Premature Withdrawal Upto 50%, when girl child attains age of 18 years or passes 10th standard, whichever is earlier , for meeting her higher education expense. Not allowed
Premature Closure Only in case of extreme financial need, wherein the parent/guardian cannot maintain the account. Or in case of death of girl child for whom the account was opened. Only in case of death of account holder.
Mode of Operation This scheme is available with Post offices as well as banks This scheme is available with banks only. FD can be created and managed via Online banking as well.
Tax Benefit EEE, Investment amount, Interest earned and maturity sum all are exempt from Income tax ETE, Investment amount and maturity sum all are exempt from Income tax. Interest earned on the FD is taxable, and TDS will be deducted by bank.
Scheme Extension Currently this scheme offers no extension option. The account will mature 21 years from the date of opening the account, if the girl child does not wish to withdraw the money then, she can continue to hold it in the scheme. No interest will be paid on the amount, post maturity of the account. No extension option is available under this scheme.
Tax Benifit under which section Deposit in the scheme is exempt u/s 80C. Interest income & maturity sum are also exempt  Deposit in the FD is exempt u/s 80C. Interest income is taxable. TDS will be deducted on the interest amount as per section 194A or section 195 of the act.

Similarity between the Schemes

Loan Facility No Loan facility is available under this scheme No loan facility against this FD
Account Limit One per girl child. One citizen can open only 1 such FD in a year. In new financial year you can open a new tax saving FD.
Transferability Account can be transferred anywhere within India. FD can be transferred to any branch of the bank in which it has been opened.

 My Opinion:

SSY is geared towards saving for a girl child’s future education and marriage, whereas taxes saving FD’s are geared towards saving tax. If you are parent/ guardian of a girl child, SSY makes way more sense for you as compared to tax saving FD, because of the following reasons:

  1. SSY offers higher interest rate than tax saving FD’s currently, is most likely to continue offering higher interest rate than the FD.
  2. SSY offers you the opportunity to save for your daughter’s future, thus tying in to your goal of saving for kids, tax saving FD do not tie in to any such goal
  3. Maturity amount under SSY, will be given to your daughter only, this will ensure that she gets the money in her hands, and it cannot be misused, or misspent by anybody else. There is no such security provision under tax saving FD.
  4. Investment under both SSY and tax saving FD are eligible for exemption u/s 80C up to maximum of Rs 1,50,000/- p.a. You will have to create a new FD each year to gain this exemption, and then store all the FD receipts carefully in order to claim your maturity amount. Where under SSY you only need to maintain one passbook, which you will need to claim the maturity amount.
  5. SSY will be a tax free scheme, with deposit, interest earned and maturity sum all being tax free. Tax saving FD is taxable. While the deposit amount qualifies for exemption, the interest earned will be taxed as per income tax act.

Final Word:

For your long term saving goals (10-15 year horizon) SSY is better suited, with lock in period of 21 years. Since daughter’s marriage and higher education both are long term goals, SSY is perfect for these.

However, if you are looking to invest for shorter term goal (5 year or less horizon) SSY doesn’t not make sense for you.  In such case Tax saving FD would be a good safe investment for you.

Always make sure to balance your investment by spreading your funds over both, low risk low return investments like tax saving FD, SSY etc; and also medium to high risk and medium to high return investments like ELSS and equity investment. To beat the current inflation rate, you need both type of investments in your portfolio.

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