Last Updated on October 1, 2023 at 4:48 pm
In a major boost to senior citizens, the union cabinet approved the doubling of the investment limit in the Pradhan Mantri Vaya Vandan Yojana (PMVVY) annuity scheme. Earlier it was Rs. 7.5 Lakh per family and now it is Rs. 15 lakh per senior citizen. A discussion on the pros and cons of this scheme and who should invest. This is the press release
What is Pradhan Mantri Vaya Vandan Yojana?
It is a scheme offering income for 10 years at an attractive 8% return (taxable as per slab). You can apply for PMVVY via the LIC between 4th May 2018 to 31st March, 2020. The purchase price is now enhanced Rs. 15 lakh per senior citizen. We can exit the scheme mid-way by paying a 2% exit load on the purchase price. There is no special death benefit other than the return of the purchase price.
So if we buy the scheme for Rs. 15 lakh, we will get a monthly sum of 15,00000 x 8%/12 = 10,000. If we opt for an annual payout, then this is equivalent to buying a bond for 10Y with 8.3% interest rate. This will be added to income and taxable as per slab. Two senior citizens in the family can now invest Rs. 15L each. If we buy the scheme via our spouse (meaning with our money), we still have to pay tax on the pension as per our slab due to income clubbing rules. So one cannot evade tax this way.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
What are the pros and cons of the scheme?
The single most important risk is reinvestment risk. That is, we buy the scheme for 15 or 30L today and after 10 years, the fixed income rates would be much lower and our income will be suddenly lower. However, we will have to recognize that many senior citizens are both unfamiliar or are uncomfortable with market-linked products (ahem mutual funds). So instead of getting fooled by greedy sales guys into buying a monthly dividend equity fund and watching the capital plummet, this is a much better option.
Guaranteeing a sum for 10Y is a pretty good deal post-age 60 and senior citizens currently in the 0% or 5% tax slabs should consider it. They are unlikely to have a corpus big enough to generate inflation-protected income anyway! So this would be a fine option to floor some income. Those in the 20% or 30% tax slabs are already generating enough fixed income from other sources! So they should only replace that with PMVVY and not add to it.
Pradhan Mantri Vaya Vandan Yojana vs Jeevan Akshay-VI
Jeevan Akshay is annuity plan that guarantees pension until life, the purchase price will (i) either be gobbled by LIC (higher pension here!) (ii) returned to spouse (ii) return to nominee after pension continues for spouse etc. There are seven such options and these are explained here: How Annuity Plans Work.
Senior citizens considering either plan must first try out this calculation: When should senior citizens purchase an annuity? or the freefincal robo advisory software template. If the results say you must buy an annuity then get one and NOT PMVVY. In other words, if the money that you have is not significant enough to take risks, then an annuity scheme (eg. Jeevan Akshay) will be more prudent. Some options here will have a higher interest rate than PMVVY, but neither the spouse or nominee will receive the purchase price after our death.
Jeevan Akshay is a better option than PMMVVY for senior citizens aged 70 and above as long as they are not interested in recovering the purchase price for their family members. A 100% pension to self and then to the spouse until her death current offers a higher rate. A solid income for life is better than income for 10 years. Someone who does not expect to live beyond 10Y (who can say that for sure!) can choose PMVVY if they have other comfortable means of income.
Pradhan Mantri Vaya Vandan Yojana vs Senior Citizens Savings Scheme (SCSS)
The current SCSS is essentially the same as PMVVY. So there is not much of a problem there and SCSS has half lock-in. So the reinvestment risk could be higher depending on rate movements. If we think that after 10Y fixed income rates will be lower than what they are now, then PMVVY is a better choice than SCSS. One can use both as well! SCSS also has a Rs. 15L per senior citizen limit.
Other considerations for PMVVY
Senior citizens with other pension and annuity sources should probably not buy PMVVY right away. They can invest their money with a small exposure to equity and consider an annuity purchase later on.
If the additional income from PMVVY can supplement their pension income and handle expenses and inflation for the next 10 years, then it is a good choice, provided, there is enough corpus left to invest untouched for 10 years. This is not an easy problem to solve and as usual, I take the conservative path in offering suggestion via the robo advisory template.
Many senior citizens hold considerable sums in fixed deposits or the Senior Citizens Savings Scheme. compared to these, PMVVY is a better choice for them if they are unwilling to consider other options (perhaps a good choice).
Like with pretty much everything else in personal finance or in life, seen in isolation most things look good (or bad) and so does PMVVY. However, senior citizens must take a holistic view of their requirements and act accordingly. While the choice of an annuity and/or PMVVY is pretty much straightforward for those in 0% or 5% slabs, those in 20% or 30% slab getting only interest income should seriously re-look their portfolio and reduce their tax liability by converting interest income to capital gains.
Here are some ways to that without much risk.
Generating tax-free income from arbitrage mutual funds?
Reducing Tax With Partial Mutual Fund Withdrawals: Examples + Calculator
If you are a young earner and “want to impart some so-called financial literacy”, to your parents, don’t! Leave them be. Read more: Should we be managing our parents’ retirement corpus? Let them invest where they are comfortable.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)