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The Budget 2015-16 has brought some good news for families with girl children, for, returns from the Sukanya Samriddhi scheme will be fully exempt from income tax. This makes it the only other instrument under Section 80C, other than Public Provident Fund (PPF) to be exempt, exempt, exempt (EEE). This means any money deposited in this scheme will be exempt from tax at the time of investment, accrual of interest and payout of returns.
Another point to consider is that for the year 2014-15 the interest has been fixed at 9.1 per cent, which is higher than the 8.7 offered by PPF. In comparison, most commercial banks offer between eight and nine per cent for one-year deposits and the interest and returns of bank fixed deposits are taxable.
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In case of PPF, partial withdrawal is allowed from seventh onwards or you can take a loan against it. In case of Sukanya Samridhi, partial withdrawal is allowed only at the end of the preceding financial year of the child attaining 18 years. So, should you rush to the nearby post office to open a Sukanya Samriddhi Scheme for your daughter? Not yet, say experts.
“The scheme does not make sense form tax saving point of view or for using the limit under Section 80C. It is useful only for those who want an extremely safe instrument to save for their daughters,” says Manikaran Singal, a certified financial planner.
For those in the 30 per cent tax bracket, instruments like Employees Provident Fund (in the case of salaried employees), PPF, life insurance premiums or home loan principal repayment will suffice to meet the Rs 1.5 lakh limit under Section 80C. So, other deductions, which are mandatory will take precedence over this optional investment.
In addition to the instruments mentioned above, Section 80C also includes investment in National Savings Certificates, Equity Linked Savings Schemes and pension funds offered by mutual funds, five-year bank FDs and expenses incurred on children’s tuition fees.
One expectation from the Budget was that the list of exemptions under Section 80C might be trimmed and some instruments might be allowed under another head. But that did not happen and it continues to be cluttered with so many options.
Anil Rego, founder & CEO if Right Horizons Financial Services, says that Sukanya Samridhi has become a category similar to PPF. It allows tax deduction and tax free returns. But while superior to PPF in terms of returns, it is inferior to PPF in flexibility. So, one should look at it only if there is a need for it.
“To get post-tax returns of 9.1 per cent from a bank FD, for instance, the pre-tax returns would have to be 13 per cent. So, if you are looking for stable returns, it is a good option. Otherwise you can look at PPF for retirement corpus and long-term equity products for children’s education,” he says.
Another factor to remember is that since interest rates are likely to go down, returns from instruments like PPF and Sukanya Samriddhi will also go down. So, parents who want to save for their children can look at other options even in debt, such as income funds.
“Many a times investors end up investing too much in conservative instruments like PPF and such deposit schemes. That is why it is important to keep a balance between such instruments and trading instruments like income funds. Otherwise, in the long run, the returns could be much lower than your requirement,” says Singal.
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