General

Pradhan Mantri Vaya Vandana Yojana

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This Blog is written by Bhumi Sharma from Amity Law School, Madhya Pradesh. Edited by Ravikiran Shukre.

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INTRODUCTION

Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a Pension Plan for Senior Citizens managed and operated by the Life Insurance Corporation (LIC). The scheme provides for an assured return of 8% percent per annum payable monthly (equivalent to 8.3% per annum) for 10 years. the scheme also offers a death benefit in the form of the return of purchase price to the nominee. However, the subscriber can opt for monthly/quarterly/ half-yearly or yearly payment of the pension.

Based on the success and popularity of other schemes like Varishtha Pension Bima Yojana 2003 (VPBY-2003), Varishtha Pension Bima Yojana 2014 (VPBY-2014), and to provide protection in the elderly age of 60 years and above against a future fall in their interest income due to the uncertain market conditions, as also to provide social security during old age, it is decided to launch a simplified scheme of Pradhan Mantri Vaya Vandana Yojana. As per the scheme, on payment of an initial lump sum amount ranging from a minimum purchase price of Rs. 1, 50,000/- for a minimum pension of Rs 1000/- per month to a maximum purchase price of Rs. 7, 50,000/- for a maximum pension of Rs. 5,000/- per month, subscribers will get an assured pension based on a guaranteed rate of return of 8% per annum, payable monthly. [1]

SIGNIFICANCE OF THIS DEVELOPMENT

The scheme allows the person to premature exit during the policy term under exceptional circumstances like the Pensioner requiring money for the treatment of any critical illness of self or spouse. The Surrender Value payable in such cases shall be 98% of Purchase Price. Minimum Entry Age: 60 years (completed). [2]

1) Maximum Entry Age: No Limit

2) Policy Term: 10 years

3) You will be paid pension for 10 years

4) You can choose pension payment frequency i.e. monthly, quarterly, half-yearly or annual

5) Minimum Pension: Rs. 1,000 per month, Rs. 3,000 per quarter, Rs. 6,000 per half year or Rs 12,000 per year

6) Maximum Pension: Rs. 5,000 per month, Rs. 15,000 per quarter, Rs. 30,000 per half year or Rs. 60,000 per year Rs. 10,000 per month, Rs. 30,000 per quarter, Rs. 60,000 per half year or Rs. 1.2 lacs per year

7) Since the interest rate is fixed at 8% p.a. 7.4% p.a. now, you can derive the minimum and maximum investment amounts from the minimum and maximum pension levels. You can use monthly compounding to calculate such amounts.

8) The limit on maximum investment is per senior citizen (and not per family). Therefore, if your spouse is also a senior citizen, he/she can invest Rs. 15 lacs in PMVVY too. Therefore, the two of you can invest a maximum of Rs. 30 lacs in PMVVY scheme. Link to Government Press Release dated May 2, 2018

9) The scheme is exempt from Goods and Services Tax (GST).

10) With monthly compounding, the effective annual return is 8.3% p.a.

11) The amount of pension is not dependent on age. This is not the case with other pension plans or annuity plans.

12) You can take a loan up to 75% of the purchase price after 3 years.

3) There is no exclusion on account of suicide. The purchase price will be returned to the nominee even in case of suicide. [3]

IMPACT

Positives of PMVVY:

Pradhan Mantri Vaya Vandana Yojana is a simple and easy to understand product. You get what you see. If you compare with a bank fixed deposit, the scheme provides a much better interest rate than a plain vanilla fixed deposit (at the moment). You can lock in the interest rate for 10 years. Well, this can be a double-edged sword.

Premium (purchase price) does not depend on age. Good for those who are in their 60s. For those in early 60s, the annuity rates, even for without return of purchase price variant, are likely to be lower than Pradhan Mantri Vaya Vandana Yojana interest rate. Hence, it might make sense for such investors to pick up Pradhan Mantri Vaya Vandana Yojana in their early 60s. After 10 years, they can consider an annuity plan without return of purchase price to generate a certain level of income. In my opinion, this is a decent option at present for those who want to keep things simple for themselves.

Negatives of PMVVY:

Pradhan Mantri Vaya Vandana Yojana is not an annuity product. Therefore, you do not lock in the interest rate for life. You do it only for 10 years. After 10 years, if the scheme is still on offer and the interest rate offered may be way different from 7.4% p.a. There is a maximum investment limit of Rs 15 lacs per senior citizen. Therefore, the quantum of income from this scheme is capped.

You cannot access money except in case of serious illnesses. There is a facility of the loan after 3 years but I wouldn’t go that far. I don’t like to pay to access my own money. Income is taxable. Effective returns can be certainly less for investors in the highest income tax bracket. [4]

CONCLUSION

The biggest change can be seen in the new modified version is the reduced pension rates. The Modified Pradhan Mantri Vaya Vandana Yojana will carry a lesser interest rate on the investment than before. Unlike in the older version of Pradhan Mantri Vaya Vandana Yojana, in the Modified Pradhan Mantri Vaya Vandana Yojana, the interest rate will keep varying depending on the financial year (FY) in which the investment is made. [5]

However, may be a good idea for those investors who fall in the lower income tax bracket (and who are in their early 60s) and are looking for a simple product.