Seeing the increasing longevity in India and to enhance the social security and welfare of senior citizens, Government had revived Varishtha Pension Bima Yojana. This pension scheme is made open for subscription only for one year i.e. from 15th August, 2014 to 14th August, 2015.
Varishtha Pension Bima Yojana is a single premium pension policy for senior citizens solely administered by LIC. The post-tax returns are guaranteed to be 9% to 9.38% p.a.
To make this scheme more appealing, Government has removed Varishtha Pension Bima Yojana from the purview of Service Tax in Budget 2015. This means w.e.f. 1st April, 2015 no service will be levied on the premium paid towards this scheme.
But does this exemption make Varishtha Pension Bima Yojana attractive? Let?s see the impact of service tax on the return of this scheme. Before we dive into the calculation part, let us give a glance on the details of this LIC operated Varishtha Pension Bima Yojana.
LIC Varishtha Pension Bima Yojana Deatils
Eligibility: Varishtha Pension Bima Yojana is only available for senior citizens aged 60 years and above. This means the minimum entry age is 60 years but there is no maximum entry age i.e. person can enter at any age after attaining the age of 60 years.
Further, only Indian Citizens are allowed to subscribe for LIC Varishtha Pension Bima Yojana.
Time Window: The scheme is made open for subscription only for the small period of 1 year starting from 15th August, 2014 which will end on 14th August, 2015.
Rate of Return: This scheme assures return of 9% on monthly payment basis, which amounts to an annualized return of 9.38%.
Investment: The minimum investment is fixed at Rs.66,665 with ceiling limit of Rs.6,66,665. This ceiling limit applies to whole family, including the pensioner, his/her spouse and dependents.
Lock-in-period: The investment gets locked-in for period of 15 years.
Pension: The pension amount ranges from Rs.500 to Rs.5,000 per month. It thoroughly depends upon the investment amount and the payout option chosen. Pension will be paid during the lifetime of the pensioner.
Payout: There is an option to get pension on monthly, quarterly, half-yearly or yearly basis.
Further, the payment will be made through directly credited to the account of the pensioner through ECS or NEFT.
Premature Withdrawal: In the case of any critical/terminal illness of self or spouse, the policy can be surrendered before 15 years. The surrender value will be given after deducting 2% as penalty for premature withdrawal i.e. the surrender value will be 98% of the investment value.
Loan Facility: Loan up to 75% of the value of the investment is available after completion of 3 policy years. The rate of interest will be fixed by LIC at the time of grating loan. Further, interest on the loan will be deducted from the pension amount and the outstanding loan will be settled from the maturity proceeds.
Nomination: On the unfortunate event of death of the pensioner, the nominee will get the full investment amount.
Free-Look Period: Similar to any other insurance policy, Varishtha Pension Bima Yojana also offers free-look period of 15 days.
LIC Varishtha Pension Bima Yojana Tax Benefits
Income Tax: Unfortunately, there is no tax benefit under Income Tax Act is available for this scheme. This means no deduction u/s 80C for the investment made towards this scheme and also the pension amount will be taxable in the hands of the pensioner.
However, like any other insurance policy, amount received on the death of the pensioner will be tax-free u/s 10(10D) in the hands of the nominee. In addition to this, another small relief is that TDS is not applicable on Varishtha Pension Bima Yojana, the onus of paying tax is on pensioner only. So, if the income of the pensioner is lower than the basic exemption limit, he is not required to fill income tax return and pay taxes on the pension amount.
Service tax: Budget 2015 gave a big relief to the Varishtha Pension Bima Yojana by making it exempted from service tax. Thus no service will be levied on the investment with effect from 1st April, 2015.
However, the benefit of service tax exemption is not retrospective, which means people who have already invested in Varishtha Pension Bima Yojana prior to 1st April, 2015 would feel neglected because their return gets lowered by the implication of service tax.
Impact of Service Tax Exemption on the return of Varishtha Pension Bima Yojana
Service tax used to levied at the rate of 3.09% on the invested amount and due to this implication; the guaranteed rate of return gets reduced by 0.27% (3.09% of 9%) under monthly option or by 0.29% (3.09% of 9.38%) under yearly option.
Does Service Exemption make Varishtha Pension Bima Yojana Attractive?
I would still feel that Varishtha Pension Bima Yojana is not much attractive because:
- The maximum pension amount is Rs.5,000 which after 15 years does not even suffice the basic needs. The worst part is the ceiling limit includes the whole family, so even if spouse wants to invest in Varishtha Pension Bima Yojana, the maximum pension amount cannot be higher than Rs.5,000 per month.
- The taxability of the pension makes it a bad deal. After tax return of Varishtha Pension Bima Yojana gets down to 8.1% to 8.44% for the pensioner falls in the lowest tax bracket of 10%. For the pensioner falls in the tax bracket of 20% or 30%, after tax-return is far worse.
- From the point of view of liquidity, Varishtha Pension Bima Yojana again scores low, as the money gets locked in for 15 years with premature withdrawal charges of 2%.
Whether to invest in Varishtha Pension Bima Yojana or not?
In my opinion, only retirees with low risk appetite and falls in lower tax bracket of 10% can have Varishtha Pension Bima Yojana as a part of their pension portfolio because of high rate of return.
For other retirees, the post-tax returns of this scheme is very low, however in the current scenario of falling interest rate, one could partially invest in the Varishtha Pension Bima Yojana.