Investing in PMVVY LIC pension scheme will not help in tax saving

When it comes to making tax-saving investments, senior citizens should not just focus on tax planning but also funding their retirement through the investment. While doing so, they should know that not all pension schemes give them tax benefit.

Not all investment avenues come with tax benefits. This is an important factor to consider, especially for senior citizens. A financial product that does not come with tax benefit is the Pradhan Mantri Vaya Vandana Yojana (PMVVY), a well-known pension scheme operated by the Life Insurance Corporation of India (LIC).

What is the Pradhan Mantri Vaya Vandana Yojana?
Senior citizens who are above the age of 60 are eligible to invest in this scheme. There is no maximum entry age. You can invest a maximum amount of Rs 15 lakh under the scheme. The scheme opened from May 4, 2017 and will be available for investment till March 31, 2023.

For the policy term of 10 years, senior citizens can get a minimum pension of Rs 1,000 per month and a maximum pension of Rs 9,250 per month depending on the amount invested.

Do keep in mind that the scheme was modified in 2020. As per the modified scheme, rate of pension under this plan will be reviewed and decided at the beginning of each year by the Ministry of Finance. Currently, the scheme is offering 7.40% per annum for monthly pension (equivalent to 7.66% per annum).

As per the government's press release, annual reset of assured rate of return with effect from April 1 of financial year in line with revised rate of returns of Senior Citizens Saving Scheme (SCSS) up to a ceiling of 7.75% with fresh appraisal of the scheme on breach of this threshold at any point.

With regards to exit from the scheme, according to the LIC website, "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."

Will you get tax savings benefit under section 80C?
Returns from this scheme will be taxed as per existing tax laws and the rate of tax as applicable from time to time. The scheme is exempted from Goods and Services Tax (GST).

Abhishek Soni, CEO, Tax2win.in - an ITR filing website says, "Usually GST is levied on the at the time of buying an insurance plan. This includes 18% GST on term insurance, 4.5% GST in the first year and 2.25% in the second year on traditional endowment insurance. Similarly, all general insurance schemes such as health insurance, motor insurance etc. have GST at 18%. However, as a relief to senior citizens, no GST is levied on the exempted insurance schemes which include Pradhan Mantri Vaya Vandana Yojana Scheme."

Investing in the scheme will not allow the investor to claim a deduction for investments up to Rs 1.5 lakh under section 80C of the Income-tax Act, as the scheme is not an eligible investment under this section of the Income-tax Act.

"Section 80C of Income-tax Act offers various specified lists of investments and expenditures on which deduction of up to Rs 1.5 lakh can be claimed. However, senior citizens making an investment in Pradhan Mantri Vaya Vandana Yojana will not be eligible to claim a deduction under Section 80C of the Income-tax Act. However, senior citizens making an investment in Senior Citizens Saving Scheme are eligible to claim deduction under Section 80C," adds Soni.

How to opt for this scheme and get payments?
A senior citizen can purchase this scheme offline as well as online through the LIC website (www.licindia.in). Senior citizens can get pension payment either in monthly, quarterly, half-yearly or yearly modes as per their discretion. Hence, the first instalment of pension will be paid after a month, three months, six months or one year from the date of purchase of the scheme depending on the mode of pension payment selected, respectively. A senior citizen will receive this pension payment through National Electronic Funds Transfer (NEFT) or Aadhaar Enabled Payment System (AEPS).

Current pension amount in PMVVY
Source: LIC website

On survival of the pensioner during the policy term of 10 years, the pension will be payable as per the payment mode selected by the pensioner and after the end of the policy term of 10 years, purchase price along with final pension instalment will be payable to the pensioner. However, in the case of pensioners' death during the policy term of 10 years, the purchase price scheme will be refunded to the nominee/beneficiary.

While the scheme does not offer Section 80C tax benefits, senior citizens who are not concerned with tax-saving could evaluate the scheme as an investment option.

Minimum & Maximum investment amount in PMVVY
Source: LIC Website

Under current income tax laws, a senior citizen has the option to opt for the new tax regime or continue with the old tax regime. Senior citizens enjoy a higher level of tax-exempted income - Rs 3 lakh per annum under the old tax regime. Super senior citizens (age above 80 years) enjoy much higher tax-exempt income limit of Rs 5 lakh per annum under the old tax regime. Because of this reason, intensive tax planning is not a necessity for many senior citizens. Their priority, instead, should be to invest in an avenue that will assure a steady income for the rest of their lives. However, there is no differential tax slab for senior citizens and super senior citizens in the new tax regime.

Senior citizens should compare this scheme with other pension schemes such as immediate annuity plans of insurance companies, Senior Citizen Savings Scheme on parameters of returns, liquidity etc. when deciding to invest.

Kapil Mehta, Co-founder, SecureNow.in - an insurance broking website says, "Annuity plans by insurance companies offer life-long pension whereas PMVVY offers pension for 10 years. If a senior citizen invests Rs 1,000, then PMVVY will give an annual pension of Rs 76.6 for 10 years whereas, for a 60-year-old, Jeevan Akshay offers Rs 58.75 every year for life under the option of guaranteed annuity for life and return of premium on death. LIC's Jeevan Akshay also offers various other options to senior citizens under different annuity plans. In another option, Jeevan Akshay offers guaranteed payments for 'specified' number of years and thereafter pension amount can increase or decrease offering lifelong pension. However, after the expiry of the 'specified' number of years, the investment amount is not paid to the nominee."

Other key highlights
Free Look period: If any senior citizen is not satisfied with the "Terms and Conditions" of the policy, then they may return the policy to the LIC within 15 days (30 days if the policy is purchased online) from the date of receipt of the policy stating the reason of objections. The refund amount you get will be the purchase price after deducting the stamp duty charges and pension paid if any.

Loan: After the completion of three years, you can avail the loan facility. You can avail a maximum loan amount equal to 75 percent of the purchase price.

Surrender Value: Under exceptional circumstances, where the pensioner requires money for the treatment of any critical illness of self or spouse, they can get 98 percent of purchase price as surrender value.

Suicide: There is no exclusion in case of suicide. In such a case, the full purchase price will be payable to the beneficiary.

What are the minimum and maximum amounts you can invest in PMVVY?
A senior citizen can invest minimum Rs 1,56,658 and maximum Rs 15 lakh in PMVVY.

What is the current interest rate of PMVVY?
Currently, PMVVY is offering 7.40% per annum for monthly pension (equivalent to 7.66% per annum). As per a government press release, annual reset of assured rate of return with effect from April 1 of financial year in line with revised rate of returns of Senior Citizens Saving Scheme (SCSS) up to a ceiling of 7.75% with fresh appraisal of the scheme on breach of this threshold at any point.

What is the last date to invest in PMVVY?
The last date to invest in PMVVY is March 31, 2023.

(With inputs from Preeti Motiani)