Pradhan Mantri Vaya Vandana Yojana: Pension Scheme for Senior Citizens [updated as per Budget 2018]

Our Prime Minister had announced a new Pension Scheme for Senior Citizens offering 8% returns for 10 years in December 2016. The proposal was also stated in Budget 2017. This has finally been launched on May 4, 2017 with the name of Pradhan Mantri Vaya Vandana Yojana 2017-18 (PMVVY).

In this post we review PMVVY and check if senior citizens should invest into it?

Salient Features:

• Minimum age for investment is 60 years
• There is no Maximum age for entry
• It gives return of 8% compounded monthly. So its equivalent of 8.30% annually.
• You can choose to receive pension monthly, quarterly, half yearly or annually
• The pension payment shall be through ECS/NEFT only
• On death of the policy holder, the premium is returned back to the nominee
• The plan is available for only 1 year i.e. from May 4, 2017 to May 3, 2018 March 31, 2020 [extended in Budget 2018] 
• The premium is exempted from GST
• LIC Plan Number: 842
• UIN: 512G311V01

Download:The ultimate ebook guide to Save Tax for FY 2018-19

Purchase Price and Pension:

The table below gives the minimum/maximum purchase price and the respective pension that one would receive for 10 years. The maximum investment limit was revised in Budget 2018 from Rs 7.5 Lakh to Rs 15 Lakh.

You can buy anything in between (including both amounts).

The maximum limit above is for one family. Family here means spouse and the dependents.

Also Read:  Best Tax Saving Investments u/s 80C

Surrender Value:

The policy can be surrendered under exceptional circumstances like money required for the treatment of any critical/terminal illness of self or spouse . The Surrender Value payable shall be 98% of Purchase Price.

Loan:

Loan facility is available after completion of 3 policy years. The maximum loan that can be granted shall be 75% of the Purchase Price. The rate of interest to be charged for loan amount would be determined from time to time by LIC. Loan interest will be recovered from pension amount payable under the policy.

Also Read: 13 Investments to Generate Regular Income

The good:

1. This is a simple product with a guaranteed return.
2. The scheme is guaranteed by Government of India and is managed by LIC. So it has safety of highest level.
3. As the economy develops the interest rates come down. Hence it’s a good product to lock 8% interest rates for 10 years. However banks too offer fixed deposit tenure for 10 years.
4. The policy can also be surrendered before maturity for treatment of illness.
5. 75% Loan against policy can be a good thing for emergency liquidity needs.

The Bad:

1. The pension you receive is taxable. This would be added to your income and taxed at your marginal tax rate, similar to fixed deposits.
2. The amount is locked-in for 10 years, so the money may not be available if required urgently (other than in case of illness)
3. The pension is not adjusted to inflation. Assuming inflation at 7%, the purchasing power of Rs 5,000 would reduce to Rs 2,500 in 10 Years.

Also Read: 25 Tax Free Incomes & Investments in India

How to Buy?

You can buy Pradhan Mantri Vaya Vandana Yojana online through LIC website.

Alternate Approach: Investments offering more than 8% for Senior Citizens

There are few investments which still offer more than 8% returns for senior citizens. You must look into the same before committing your funds to Pradhan Mantri Vaya Vandana Yojana.

1. Deutsche Bank (5 years), IDFC Bank (366 days), Lakshmi Vilas Bank (750 days)  offers 8.0% for senior citizens fixed deposit.

The added advantage is you can withdraw the amount anytime.

Also Read: Best Interest Rate on Senior Citizens Bank Fixed Deposits

2. NCDs/Bonds listed on Stock exchange. Some examples:

• M&M Financial Services (AAA rated) has yield of 8.64% and residual maturity of 9.11 years
• Edelweiss Housing Finance Ltd (AA+ rated) has yield of 9.71% and residual maturity of 9.49 years
• Reliance Home Finance Ltd (AA rated) has yield of 9.51% and residual maturity of 14.69 years

The problem is the liquidity for these bonds are low and hence it’s difficult to buy/sell. However you can buy easily when they are issued.

Also Read: Latest NCD open for subscription

3. Tax Free Bonds listed on Stock Exchanges

PFC, HUDCO, NABARD, IRFC etc had issued tax free bonds in the past and are available on exchanges with yields in the range of 6.44%. The bonds have residual maturity of 10 to 15 years. As the interest received is tax free, these turn out to be better investments for senior citizens in highest tax bracket. The interest payout is annual. Also all the companies are backed by Government of India and also AAA rated – hence safe for investment.

4. Senior Citizens Saving Scheme

Senior Citizens Saving Scheme offers 8.3% interest which is payable quarterly. This too is backed by Government of India and so is safe. The problem is you can lock-in your amount only for 5 years.

Also Read: All about Senior Citizens’ Savings Scheme

5. DHFL Aashray Deposit Plus

DHFL is housing finance company and is rated AAA. It offers 8.45% to senior citizens for fixed deposit up to 10 years. You can choose to get interest monthly, quarterly, half-yearly or yearly.

6. Debt Mutual Funds

Regular income can be generated by investing and then using SWP (Systematic Withdrawal Plan) to generate regular income. This is usually more tax efficient than fixed deposits. Also the returns are closer to bank fixed deposits.

Read: How SWP in Debt Mutual Funds is better than Fixed Deposit for Regular Income?

Should you invest in PMVVY:

I think Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a good and simple product especially for aged people looking for regular income after retirement. But there are other investments as listed above which offer more returns. You must evaluate those before locking your money in the pension plan.