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 and you can invest this amount on or before March 31, 2020. 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 10,000 per month depending on the amount invested.
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).
Vinay Taluja, National Head – Solutions, Bajaj Capital says, “When you buy an insurance product, GST is levied on the schemes depending upon the type of insurance solution you have had purchased. For instance, term insurance includes 18 percent GST, traditional endowment insurance includes 4.5 percent GST for the first year and 2.25 percent from second year onwards. All general insurance scheme includes 18 percent GST. However, to give a relief, especially to senior citizens, there are a few LIC schemes including Pradhan Mantri Vaya Vandana Yojana scheme, which continues to be exempted under GST as they were exempted from service tax before July 1, 2017.”
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.
S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys says that the provisions of section 80C of Income Tax Act contain an exhaustive list of deductions. Though the provisions of section 80C provide a deduction for sum deposited under Senior Citizens’ Saving Scheme, a similar deduction is not available for Pradhan Mantri Vaya Yojna. “However, a representation can be filed before Income Tax Department to include the sum paid under this scheme as an eligible deduction under section 80C of Income Tax Act to bring this scheme at same pedestal as the Senior Citizens’ Saving Scheme. The inclusion, however, will require legislative amendment which can be made in the subsequent budgets,” he said.
How to opt for this scheme and get payments?
A senior citizen can purchase this scheme offline as well as online by 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 installment 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).
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 installment 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. Adhil Shetty, CEO, BankBazaar.com says that senior citizens enjoy higher level of tax exempted income as Rs 3 lakh per annum is the tax exemption limit for them as per the tax slab rates. Super senior citizens (age above 80) enjoy much higher tax-exempt income limit of Rs 5 lakh per annum. Because of this reason, intensive tax planning is not a necessity for many senior citizens. Their priority, instead, should be invest in an avenue that will assure steady income for the rest of their lives. “Hence, by investing in this scheme you get 8 percent returns on the invested corpus along with a maximum monthly income of Rs 10,000 today. Basically, with pension plans, low returns have been a concern, and therefore a plan like this which is offering 8 percent assured returns is a welcome move,” he said.
However, 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.
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.