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Friday, March 16, 2018

Pradhan Mantri Vaya Vandana Yojana (PMVVY) for Sr Citizens

The ‘Pradhan Mantri Vaya Vandana Yojana (PMVVY)’ provides social security and protects our senior citizens aged 60 and above against a future fall in their interest income due to uncertain market conditions. The scheme enables old age income security for senior citizens through provision of assured pension/return. Let us learn more about it..

General Guidelines about PMVVY
1/ The scheme provides pension at an assured return of 8% per annum for 10 years.
2/ LIC of India has been given the sole privilege to operate this scheme.
3/ The differential return, i.e. the difference between return generated by LIC and the assured return of 8% per annum would be borne by Government of India as subsidy on an annual basis.
4/ Pension is payable at the end of each selected period during the policy tenure of 10 years as per the frequency of monthly/quarterly/half-yearly/yearly as chosen by the subscriber at the time of purchase.
5/ Currently, the maximum amount the amount a senior citizen can invest is INR 7.5 lakh. The proposed change in Budget 2018 will double it to INR 15 lakh.
6/ The scheme is exempted from Goods and Services Tax (GST).
7/ The scheme was launched on 4th May 2017, and is available for subscription until March 2020.
8/ This scheme can be purchased offline (by visiting your nearest LIC branch and submitting a form) as well as online (by logging on to the the LIC website)

Purchasing the Scheme
The scheme can be purchased by payment of a lump sum Purchase Price. The pensioner has an option to choose either the Amount of Pension or the Purchase Price.
The minimum and maximum Purchase Price under different modes of pension will be as under. Please note that the below figures are based on the current limit of INR 7.5 Lacs. These will be revised based on the new limit of INR 15 Lacs.

Pension Mode Min. Purchase Price Max. Purchase Price
Yearly Rs. 1,44,578/- Rs. 7,22,892/-
Half-yearly Rs. 1,47,601/- Rs. 7,38,007/-
Quarterly Rs. 1,49,068/- Rs. 7,45,342/-
Monthly Rs. 1,50,000/- Rs. 7,50,000/-
The Purchase Price to be charged shall be rounded to nearest rupee.

Upper Ceiling
There is a ceiling of maximum pension for a family as a whole i.e. total amount of pension under all the policies allowed to a family under this plan shall not exceed the maximum pension limit. The family for this purpose will comprise of pensioner, his/her spouse and dependents.

Benefits
Pension Payment : On survival of the Pensioner during the policy term of 10 years, pension in arrears (at the end of each period as per mode chosen) shall be payable.
Death Benefit : On death of the Pensioner during the policy term of 10 years, the Purchase Price shall be refunded to beneficiary.
Maturity Benefit : On survival of the pensioner to the end of the policy term of 10 years, Purchase price along with final pension installment shall be payable.

Compared to Other Similar Schemes
Unlike other pension plans such as Jeevan Akshay, (an immediate annuity scheme of LIC ) the amount of pension in PMVVY is not based on age. The return in PMVVY range from 8 to 8.3 percent depending on the mode of pension that one chooses. 
Similar to post office monthly income scheme or the senior citizen savings scheme (SCSS), the maximum investment amount (purchase price) and the pension amount that one can get is capped.

Mode of pension payment
1/ The modes of pension payments are monthly, quarterly, half-yearly & yearly. 
2/ The pension payment shall be made only through NEFT or Aadhaar Enabled Payment System.
3/ The first installment of pension shall be paid after 1 year, 6 months, 3 months or 1 month from the date of purchase of the same depending on the mode of pension payment i.e. yearly, half-yearly, quarterly or monthly respectively.

Illustrative Example
If one invests Rs 5 lakh (purchase price) and opts for a yearly pension, the pension amount will be: 
For every Rs 1,000, it is Rs 83 per annum.
Therefore for Rs 5 lakh, the pension amount comes to Rs 41,500 annually. 
So, if one needs a monthly pension of Rs 3,000 (or Rs. 36,000 annually), one needs to invest Rs 4.5 lakh. 
On investing the maximum allowed amount of Rs 7.5 lakh, a monthly pension for ten years will be Rs 5,000.

Surrender Value / Premature Exit
The scheme allows premature exit during the policy term under exceptional circumstances like the Pensioner requiring money for the treatment of any critical/terminal illness of self or spouse. The Surrender Value payable in such cases shall be 98% of Purchase Price.

Loan
1/ Loan facility is available after completion of 3 policy years. 
2/ The maximum loan that can be granted shall be 75% of the Purchase Price.
3/ The rate of interest to be charged for loan amount shall be determined at periodic intervals. For the loan sanctioned in Financial Year 2016-17, the applicable interest rate is 10% p.a. payable half-yearly for the entire term of the loan.
4/ Loan interest will be recovered from pension amount payable under the policy. 
5/ The Loan interest will accrue as per the frequency of pension payment under the policy and it will be due on the due date of pension. 
6/ However, the loan outstanding shall be recovered from the claim proceeds at the time of exit.

Taxability 
There is no tax benefit available on the amount invested. 
Further, the pension received will be fully taxable in the hands of the individual in the year of receipt. 
The government, however, has exempted PMVVY from GST.

Free Look period
If a policyholder is not satisfied with the “Terms and Conditions” of the policy, he/she may return the policy to the Corporation within 15 days (30 days if this policy is purchased online) from the date of receipt of the policy stating the reason of objections.
The amount to be refunded within free look period shall be the Purchase Price deposited by the policyholder after deducting the charges for Stamp duty and pension paid, if any.

Exclusion
Suicide: There shall be no exclusion on count of suicide and full Purchase Price shall be payable.

Conclusion 
PMVVY does not come with any tax benefit on either the invested amount or the returns generated. It, however, offers a return higher than bank FD's and comes with a sovereign guarantee. 
Importantly, as interest rates in the country are on the way down, PMVVY locks up the funds for a longer duration and assures a fixed income for the next ten years. The downside is that if the interest rate takes a u-turn anytime during the tenure, the investor will be at a disadvantage as liquidity in PMVVY is highly restrictive. Invest only a portion of your funds which you feel can be parked for a longer tenure.


Cheers

Manoj Arora

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