Brought in by the NDA in 2003-04 and later discontinued, the government’s pension plan for senior citizens, Varishtha Bima Yojana, has been re-introduced. The scheme, as earlier, will be administered by LIC and promises a high 9-9.38 per cent annual return. Re-launched on Independence Day, the scheme will be open for one year (till August of 2015) for senior citizens above 60 years of age.

What is the promise? Varishtha Bima Yojana is a single premium pension policy for senior citizens, with pension starting to flow in immediately. One can opt to receive the pension either monthly, quarterly, half yearly or annually.

Based on the frequency in which you choose to receive the pension, there are ceilings on the maximum and minimum amount of investment.

Say you want a monthly pension, the maximum you can invest under this policy is ₹6,66,665.

This will give you a pension of ₹5,000 every month, translating into a return of 9 per cent per annum. But say you want a yearly pension, the maximum amount that can be invested is only ₹6,39,610. This will give you a pension of ₹60,000 a year − a return of 9.38 per cent.

If two or more senior people in a family want to invest jointly in this policy, they can. But together, their total investment cannot exceed the limits specified. The invested amount (also termed as purchase price) will be returned on the death of the policyholder or on surrender of the policy.

Surrender is allowed after 15 years. Upon exceptional conditions such as treatment of any ailment for self or spouse, an early surrender is allowed and the policyholder will get 98 per cent of the invested amount.

There is a loan facility under this policy. After three years, a policyholder can borrow up to a maximum of 75 per cent of the invested amount. Interest on the loan will be adjusted against the pension amount paid.

Our take Varishtha Bima Yojana promises a high return, but the ceiling on maximum investment makes it unattractive.

The pension of ₹5,000 a month will not be sufficient to support a normal lifestyle, given inflation in the cost of healthcare and cost of living. Also, with restrictions on surrender of the policy before completion of 15 years, there is low liquidity under the policy. Further, one can’t claim a tax deduction under Section 80C on the amount invested in the policy and the pension received will be taxable if the individual’s income falls in the tax net.

However, given that this policy promises a high 9.38 per cent annual return, you may consider it. It can be a part of your pension portfolio to boost overall returns. The other attractive options for regular income that senior people can look at are the Post Office Senior Citizens’ Scheme and bank fixed deposits. For the Senior Citizens Scheme, the interest rate for 2014-15 is 9.2 per cent per annum. Withdrawals are allowed after the first year with a small charge.

One can invest a maximum of ₹15 lakh under this scheme. Interest is paid out quarterly. Contributions to this scheme are eligible for tax benefit under Section 80C up to the ceiling of ₹1.5 lakh. The term of the deposit is five years. On maturity, one can extend the period of investment by another three years.

In fixed deposits, banks offer 0.25 to 0.5-percentage point higher rates for senior citizens. One can opt to receive interest either monthly or quarterly. Note that interest income from bank FDs and the Post Office Senior Citizen Savings Scheme is taxable.

Related Topics
comment COMMENT NOW