The Government of India is going to wind up its pension scheme for senior citizens called Varishtha Pension Bima Yojana (VPBY) on August 14.
Union Finance Minister Arun Jaitley had reintroduced VPBY in the Union Budget 2014-15 with an aim to provide old age pension security to senior citizens. The scheme opened for subscription on August 16, 2014 and closes on August 14, 2015. The NDA government had first launched this scheme in FY 2003-04. The scheme has assets under management of Rs.6,095 crore from over 3.16 lakh subscribers.
LIC of India is managing this scheme. The scheme doesn’t offer any tax benefit. The accrued interest will be taxed at marginal rate of taxation. However, the government has exempted VPBY from the purview of service tax with effect from April 1, 2015.
VPBY is basically an immediate annuity policy with a return of purchase price (principal) for senior citizens. Simply put, the invested amount will be given back either to an investor any time after a lock-in period of 15 years or her nominee on death of annuitant. However, in case of surrender before 15 years for any medical emergencies for the policyholder or the spouse, only 98% of the purchase price will be returned to the policyholder. Also, one can avail a loan after 3 years. This loan amount can be a maximum of 75% of the purchase price.
Only senior citizens 60 years and above of age can invest in this scheme. Such investors can invest a minimum lumpsum of Rs.66,665 or a maximum of Rs.6.67 lakh. The pension amount ranges between Rs.500 per month and Rs.5,000 per month.
Agents get 0.1% of purchase price as commission to distribute VNPY.
The scheme offers a guaranteed yield of 9%-9.38% per annum.
The scheme is suitable for senior citizens earning less than Rs.3 lakh per annum or Rs.5 lakh per annum (falling under 10% tax bracket). For investors falling under higher tax bracket, the real return comes down to 7.09% (investor falling under 20% tax slab) and 6.91% (investors falling under 30% tax slab).
Pankaj Mathpal of Optima Money is of the view that risk averse investors can consider to put a small portion in this scheme for asset allocation.
Suresh Sadagopan of Ladder7 Wealth Advisories believes that the scheme is better than other annuity products in the market. “Considering the returns, this scheme suits well for investors seeking risk free returns. However, for investors falling under high tax bracket, this scheme has nothing to offer.”