For senior citizens looking for regular income, safety and reasonable returns, there is now a fresh chance to invest in the Pradhan Mantri Vaya Vandana Yojana (PMVVY). The scheme was to be discontinued in March this year, but has just been extended for a period of three years.
There are a couple of tweaks in the scheme though. The interest rate has now been reduced to 7.4 per cent, down from 8 per cent for the previous year. There is also a provision now to reset the rate of interest payable each year. Given the sovereign’s safety and the attractive interest rate – which is higher than those offered by small-savings schemes and bank FDs – you must give it careful consideration. In a recent story, we had asked sounded you off on the possibility of the government extending the scheme.
The interest rates on offer are higher than comparable options. The Post Office monthly income scheme account (POMIS) offers 6.6 per cent rate of interest. The five-year and higher tenure Wecare fixed deposits – offered just to senior citizens by SBI – give 30 basis points more, that is, 6.5 per cent.
PMVVY comes with a government-backed guarantee, so there is no credit risk. The longer tenure of 10 years works well for those who do not wish to revisit their portfolios every now and then.
Adding to the suite of retirement schemes
PMVVY adds to the growing list of products targeted towards senior citizens. The good old Senior Citizen Saving Scheme (SCSS) and the RBI (taxable) bonds offering 7.75 per cent interest are attractive options. The trio make an interesting combination for regular income seekers. PMVVY’s interest rate is in line with that of SCSS (also 7.4 percent annually) for the current financial year. Fresh investments will attract the then prevalent rate.
Additionally, there is the RBI bond that pays 7.75 per cent per year interest distributed half yearly or you can opt for cumulative payment. PMVVY pension is payable monthly, quarterly, half yearly and yearly. SCSS pays interest at the end of every quarter.
You can invest up to Rs 15 lakh each in the SCSS and PMVVY. There is no limit on investments in RBI bonds. These avenues make compelling investment cases for senior citizens.
Investment period and taxation
The PMVVY has a 10-year lock-in, compared to five years for the SCSS and seven years for the RBU bonds. Premature surrender of the PMVVY in case the investor or spouse suffers from terminal illness or critical illness is allowed. In such cases, 98 per cent of the purchase price is paid back to the policyholders. SCSS also allows premature withdrawal by deducting up to 1.5 per cent of the deposit. In the case of RBI bonds, for investors aged above 60, 70 and 80 there is an option to surrender after completing six, five and four years, respectively.
“For regular income seeking individuals PMVVY is a good investment option. However, it scores low on liquidity,” says Nirad Shah, vice president, Wealth First Portfolio Managers.
The interest earned on the PMVVY (as also from SCSS and RBI bonds) gets added to your income and is taxed as per your slab rate. SCSS investments qualify for 80C tax deductions of up to Rs 1.5 lakh in a financial year.
Should you invest?
Investing in these products means locking into the interest rates. In a falling interest rate regime, it may be advisable to do so.
“A combination of SCSS, RBI Bonds and PMVVY can offer a good bouquet of investment products for senior citizens in low income brackets,” says Vishal Dhawan, chief financial planner of Plan Ahead Financial Planners. You can build a ladder of investments in these products. For example, if you invest Rs 3 lakh every year, over five years, you will have parked Rs 15 lakh the in SCSS; the maximum you can invest in this scheme. You get the section 80C deduction every year and you reduce the reinvestment risk. After five years, you also get maturity proceeds each year. You can also invest in a staggered manner in RBI bonds as well as the PMVVY. In a falling interest rate scenario, if you stagger your investments, then you are exposed to the risk of contracting your money at lower rate of interest as time passes by.
SCSS and PMVVY together can help you invest up to Rs 30 lakh. Consider some allocation to RBI bonds; there is no upper limit on investments in them. But do not forget that these investments are not as liquid as your bank fixed deposits. Do keep some money in fixed deposits of banks to tide over emergencies and to meet short-term financial goals.