PPF vs SSY: Where should you invest for your daughter's education?

While Sukanya Samriddhi Yojana offers a higher interest rate, PPF can be continued for a longer tenure and offers greater flexibility after 15 years

If you have recently welcomed a baby girl into your family, this is also the time when you should start investing for her education. The sooner you begin, the lower will be the burden on your pocket. The next question is where you should invest for this goal.

There are many products you can use: bank fixed deposits, recurring deposits, blue-chip stocks, mutual funds, unit linked insurance plans (Ulips), traditional insurance plans, or small savings schemes such as Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY).

Here, let’s focus on PPF and SSY. Both are risk-free products backed by the Government of India. Both fall under EEE (exempt-exempt-exempt) tax regime.

If you had to choose one of the two as an investment vehicle for your daughter’s education, what would you choose? As always, there is no crisp answer as both these products score over the other on certain counts.

Where SSY scores

Interest rate: SSY offers a higher rate of interest than PPF. And this has always been the case. SSY offers 0.5 percentage point more than PPF. Currently SSY offers 7.6 per cent while PPF offers only 7.1 per cent a year.

Contribution: You cannot put more than Rs 1.5 lakh per annum in a PPF account. There is an additional restriction.

Assuming a family of four (father, mother, son, and daughter), you cannot invest more Rs 3 lakh per annum in PPF (Rs 1.5 lakh per annum per adult), assuming the children are minor.

Every minor PPF account must have a guardian. And the PPF rule is that you cannot put more than Rs 1.5 lakh per annum cumulatively in your PPF account and the PPF account where you are the guardian. So, if you are a guardian in your daughter’s PPF account and you have put Rs 80,000 in your PPF account, you cannot put more than Rs 70,000 in your daughter’s PPF account. While there are ways to circumvent this restriction, such ways are against the spirit of the law.

Therefore, if you limit yourself to PPF, you cannot put more than Rs 3 lakh (between you and spouse) in this risk-free, tax-free, high return product.

Enter SSY. Continuing with the same example, you can put Rs 1.5 lakh in your daughter’s SSY account. If you have two daughters, you can put Rs 3 lakh (Rs 1.5 lakh each).

So, your total contribution to tax-free, risk-free and high-return products can go up to Rs 6 lakh: Rs 1.5 lakh in PPF (self or where you are guardian) + Rs 1.5 lakh in PPF (spouse or as guardian) + Rs 1.5 lakh in SSY (of first daughter) + Rs 1.5 lakh in SSY (of second daughter).

Where PPF scores

Eligibility: Anyone can open a PPF account, irrespective of age and gender. You don’t get such simplicity with SSY. SSY can only be opened for girls under 10 years of age. Additionally, you can open SSY only for two daughters. There is an exception to this rule. You can open SSY account for three daughters if you have twin girls at the time of second birth or triplets at the time of first birth.

Number of contributions: You can only invest in a SSY account for 15 years. That limits the kind of corpus you can accumulate in SSY. No such restriction exists in the case of PPF. You can contribute for as long as you are alive (assuming you keep extending the account). Hence, you can accumulate a much bigger corpus in PPF.

Product maturity: SSY is a limited duration product. The account matures after 21 years. Even if you do not close the account on completion of 21 years, you won’t earn interest on the balance anymore. Premature closure is permitted at the time of marriage of the account holder.

PPF does not have such limitations. A PPF account can be continued for life. The PPF has initial maturity of 15 years. However, you don’t have to close the account on the completion of 15 years. You can extend the account in blocks of five years any number of times. So, if your PPF account is about to complete 15 years, you can make an application to extend it by another 5 years (20 years). You can continue the account with or without contributions (default). You can also use PPF smartly as a pension tool.

NRIs face an issue: Non-residents cannot open PPF or SSY accounts. However, there is a possibility that you were a resident when you opened an SSY or PPF account and subsequently became an NRI.

If an SSY account holder becomes an NRI, the SSY account must be closed. You must intimate such change to the bank/post-office within one month of moving abroad. According to the rules, the SSY account is deemed closed from the date of change of residential status (whether you inform the bank/post-office or not). Such an account does not earn any further interest. If any interest has been credited to the SSY account after the change in residential status, that interest will be clawed back.

Therefore, if you are planning to move abroad with your family soon, opening an SSY account for your daughter may not be a good idea.

With PPF, you can continue the account until maturity even if you become an NRI. NRIs, however, can’t extend their PPF accounts.

Withdrawal rules: SSY withdrawal rules are rigid. You can withdraw up to 50% of the account balance at the end of the previous financial year for the purpose of higher education of the beneficiary (girl).  This is allowed only when the girl child turns 18 or has passed 10th standard, whichever is earlier. Even for this, you need to provide documentary evidence of admission, fee, etc.

The beneficiary can withdraw the entire amount on the completion of 21 years. There is an option to withdraw the complete amount at the time of marriage if it happens before the completion of 21 years.

By the way, all these restrictions are there for a reason. In our country, the interests of daughters are often neglected. Such rules have been put in place to ensure the funds get used only for the intended purpose, i.e., education and welfare of the girl child.

PPF withdrawal rules are very flexible after the completion of initial maturity of 15 years. If you continue the account with contribution, you can withdraw up to 60 per cent of the balance at the end of the previous cycle during this cycle (five years of extension). If you continue the account without extension, you can withdraw even the entire amount.

Minors will eventually become majors: We saw in the previous section that you can invest only Rs 1.5 lakh per annum per adult. Therefore, for a family of four (parents and two minor kids), the maximum the family can contribute to PPF is Rs 3 lakh per annum.

However, the kids will eventually turn 18 and become adults. Then, you (the family) can invest much more. So, if your kids are above 18, you can put 4 x Rs1.5 lakh = Rs 6 lakh in the PPF account.

PPF vs SSY: What should you choose?

It does not have to be an either-or answer. Why not both? Both PPF and SSY are excellent fixed-income products. There is no credit risk. Both get you tax benefits under Section 80C. And the interest income from both is tax free.

SSY offers a higher rate of interest but cannot be continued for life. PPF offers a slightly lower rate of interest but is super flexible and can be continued for life.

The PPF account becomes very flexible after the completion of the initial maturity period of 15 years. Therefore, by opening the PPF account for your kids, you at least start the countdown to 15 years. You may only make a minimum contribution.

I would recommend opening both an SSY account and a PPF account for your daughter. Based on your preference, you can decide how much to contribute to each of them.

A quick comparison 

• SSY offers a superior interest rate and permit higher annual contributions in certain cases
• PPF has no age eligibity bar and has provisions for a longer investment horizon. Withdrawal is also easier
• Both are extremely safe investments with great tax breaks. You might want to consider a mix of both

The writer is a Sebi-registered investment advisor (RIA) and founder, PersonalFinancePlan