Pensions

Should you opt for Pradhan Mantri Vaya Vandana Yojana?

There is a new scheme on the block with a name that promises to celebrate the seniors. It is aptly called ‘Pradhan Mantri Vaya Vandana Yojana’ or PMVVY. DNA Money brings you the the pros and cons.

Basic details – This is a scheme where one could invest up to Rs 7.5 lakh at a family level and get up to Rs 5,000 per month as income. “One can get payouts in the monthly, quarterly, half yearly or annual modes. The interest rates vary from 8% for monthly mode to 8.3% for annual mode. This is a ten-year scheme which is available for those who have crossed 60 years of age,” said Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

After 10 years, the investor would get back the original invested amount. If there is an emergency like a critical illness one may be able to withdraw 98% of the original investment. If the investor were to pass away during the tenure of the investment, the purchase price will go to the beneficiary, he added.

For those who seek a steady income, this scheme along with Senior Citizens Savings Scheme (SCSS) is useful.

Where it scores – Firstly, the PMVVY is a retirement product with practically no risk factors. Ajit Narasimhan, category head – savings and investments, BankBazaar.com says, “It provides depositors a stable return of 8-8.3% for the next 10 years. In these days of falling interest rates, an assured return is not a bad idea. Moreover, it comes with monthly, quarterly, half-yearly or yearly pensions, with the interest rate on monthly pensions at 8% and yearly pensions at 8.3%. This puts it at par with the SCSS.”

However, unlike SCSS, which could see a downward revision if rates were to fall further, the PMVVY would not change over the period of investment. “This is one way it scores over SCSS. Also, PMVVY allows depositors to avail loans up to 75% of purchase price after three years of the policy,” points out Narasimhan.

Pankaaj Maalde, certified financial planner, feels PMVVY is a good option for lower middle class family whose monthly expenditure is around Rs 10,000 and who do not want to take any risk. “Also, a large number of people in India do not have access to quality advice. Instead of putting money in ponzy schemes this is good option as there is no risk. Both the partners can apply in their individual name to get Rs 5,000 per month each as pension. Even it is not subject to TDS,” opines Maalde.

Where it doesn’t score – Taxation doubts and a long lock-in are some sore points.

PMVVY has a long lock-in period of 10 years, unlike five years for SCSS or systematic withdrawal plans in case of debt funds.

“So liquidity is a factor. Also, the total corpus that can be invested, Rs 7.5 lakh, is also less compared to Rs 15 lakh in SCSS. There is also a minimum limit of Rs 1.5 lakh for investment. Then again, while 8.3% risk-free interest is a good return, there are several long-term debt funds that can provide much higher returns. In addition, debt funds usually come with systematic withdrawal plan so that investors can withdraw without penalties,” remarks Narasimhan.

According to Archit Gupta, founder and CEO, ClearTax, “While the PMVVY is a good pension scheme for people who wish to seek a pension from limited means, it does lack in terms of being tax efficient.”

Gupta feels there is no tax-saving benefit available on investments made in this scheme, which is a benefit that comes with other pension schemes like SCSS and National Pension System (NPS). This is a minus point.

Gupta also says, “There is also no clarity on the taxation of maturity proceeds, so we have to believe as of now that they won’t be tax-free. Since this is a new scheme, we expect the government to further clarify these aspects and possibly make it more attractive for pensioners.”

The interest income in PMVVY is taxable which reduces overall return, reasons Maalde.

EVALUATE YOUR OPTIONS

  • The scheme does not change over the investment period and allows depositors to avail loans up to 75% of purchase price after three years of the policy
  • It also provides stable returns which is better in the scenario of falling interest rates
  • However, Pradhan Mantri Vaya Vandana Yojana entails long lock-in and there is no clarity if maturity proceeds are tax free
  • The interest income in the scheme is also taxable which reduces the overall returns, according to experts

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