The Varishtha Pension Bima Yojana (VPBY) 2017, a scheme unannounced by the Prime Minster Narendra Modi on new year eve was approved by the cabinet on Tuesday.
Post demonetisation banks are slashing interest rate on fixed deposits. Therefore, to guard the interest of the senior citizens (above 60 years of age) in case of falling interest rates, PM Modi announced this scheme with a guaranteed interest of 8 per cent for 10 years.
The scheme will be launched by Life Insurance Corporation of India on April 1st as per sources. If there is a shortfall between LIC generated return and the guaranteed 8 per cent return, it would be borne by the government.
The subscriber will have the option to opt for a pension on a monthly, quarterly, half yearly and annual basis. The scheme will remain open for subscription for one year from the date of launch.
PM Modi had announced that senior citizens will be able to make an investment of up to Rs 7.5 lakh in the scheme.
However, one point to note is the duration for which pension is guaranteed in VPBY 2017. The scheme states that it will provide an assured pension for ten years. But experts say to fall under the definition of life insurance, annuity should be provided for life to the annuitant. It cannot be for certain number of years. It is, therefore, expected that LIC might come up with an option of guaranteed annuity (8%) for 10 years, and thereafter it might re-fix the rates according to the prevalent interest rate scenario. Should you invest?Experts are awaiting details on VPBY 2017. However, given the interest rate and tenure one can do some comparison with the other schemes available in the market.
There are other options such as small savings schemes which offer slightly higher rate than banks fixed deposits and are popular among senior citizens.
Senior Citizens Savings Scheme (SCSS) is currently offering an interest rate of 8.5 per cent but the return on SCSS is linked to the government securities yield of same maturity and is subject to revision every quarter and have a maturity of five years. If you want to reinvest after the term is over you will have to do it at the prevailing market rates.
There are Government of India Savings Bonds, which offer interest rate of 8 per cent in which anyone can invest. There is no age limit or cap on investment. These bonds have a tenure of six years and investors can choose to take interest either on a half yearly basis or on a commutative basis at the end of the tenure.
However, experts feel VBPY 2017 will be a good option as interest rates are on a downward trajectory and are likely to continue so at least in the near future. The banks are offering an interest of 7 per cent on fixed deposits of 10 years to senior citizens.
"With interest rates moving down, this will be a good option. Since the scheme will be open for one year from the date of launch, it will advisable to wait and see during the year whether Reserve Bankof India cuts rates further or not and then decide to invest if interest rates move down further," said Manoj Nagpal, CEO, Outlook Asia Capital.
"Considering the interest rate are falling it may not be a bad idea for senior citizens especially, those who fall in the lower tax bracket. But as the interest income will be taxable, those who fall in the higher tax bracket can also look at options such as tax free bonds," said Anil Rego, CEO & Founder, Right Horizons.