7.4% interest rate locked in for 10 years: Who should buy LIC's PMVVY

SCSS, which offers 80C benefit, allows you to lock in at 7.6% for five years

Senior citizens have slightly over three months left to subscribe to the Pradhan Mantri Vaya Vandana Yojana (PMVVY). This scheme, administered by the Life Insurance Corporation of India, is a government-backed pension scheme for senior citizens which provides an interest rate of 7.4 per cent per annum, payable monthly. This assured rate of pension will be payable for the full term of 10 years for all policies purchased until March 31, 2023.

Mrin Agarwal, founder-director, Finsafe, says, “Seniors can use PMVVY to lock into returns for the long term.” Adds Maneet Pal Singh, partner, IP Pasricha & Co, says, “The scheme can protect senior citizens against a fall in interest rates in the future.”  

Attractive, risk-free return

This government-guaranteed scheme carries zero default risk. The rate of return is decent. Amar Ranu, head-investment products & advisory, Anand Rathi Shares & Stock Brokers, says, “The assured rate of return of 7.4 per cent is for the monthly option. This can go up to 7.66 per cent for the annual option. These are very competitive rates.”

According to Vishal Dhawan, board member, Association of Registered Investment Advisors (ARIA), “This product frees a person of reinvestment risk for a long period.”

Long lock-in, return taxable

The interest income from PMVVY, however, is fully taxable.

Mumbai-based certified financial planner (CFP) Kiran Telang says, “The product comes with a lock-in.” Premature withdrawal before completion of the 10-year tenure is allowed only in the case of a critical ailment to self or spouse. Sanjeev Sachdeva, partner, Luthra and Luthra Law Offices India, says that a loan can be taken against the plan after three years.

The investment amount is capped at Rs 15 lakh per individual. Dhawan says, “The lack of an inflation adjustment factor means the same value of money received will support a progressively lower lifestyle over time.”

Consider SCSS

Next, let us examine how PMVVY compares with other major products for senior citizens, like immediate annuities and Senior Citizen Savings Scheme (SCSS).

Annuities allow investors to lock in the rate of return for a lifetime. Ranu says, “Annuity schemes give payout rates of 5.95 per cent to 6.12 per cent for the return of purchase price (RoPP) option and 6.19 per cent to 7.2 per cent for the without RoPP option.”

More people prefer the with-RoPP option, whose returns are lower. Investors who want a higher return from annuities may go for the without-RoPP option and stagger their annuity purchases (rates improve with age). Senior citizens can lock into PMVVY at 60, exit at 70, and buy without-RoPP annuity with it.  

SCSS is another sovereign-backed scheme that offers 7.6 per cent. Its tenor is only five years (extendable by three years). Sachdeva says, “Investment in SCSS up to Rs 1.5 lakh is eligible for deduction under Section 80C of the Income-Tax Act.” Interest income from SCSS is also taxed at marginal slab rate.

Ranu adds, “These days some corporate bonds and corporate fixed deposits also offer monthly payout options for long tenures like 10 years, but they carry credit risk whose level depends on the issuer’s long-term credit rating.”

Who should buy it?

Agarwal says PMVVY should be bought only by those who can hold on to it for the long term and are unlikely to require liquidity in the interim.  

The size of the retirement corpus also matters. Telang says, “This is a good scheme for those who don’t have a resource crunch. It might not work for someone with Rs 35 lakh but may for someone with Rs 1 crore.”

Singh says, “SCSS is a better option than PMVVY since it offers deduction under Section 80C.”

If you want the Section 80C benefit, then exhaust your SCSS limit and then opt for PMVVY. Dhawan says, “It is ideal to use PMVVY in combination with SCSS, which is a shorter-tenor product, has quarterly payouts, and offers liquidity on principal.”

Senior citizens falling in the 30 per cent or higher tax brackets may look for more tax-effective options. Ranu says, “One can opt for long maturity roll down funds like the Nippon India Nivesh Lakshya Fund. At present, the net YTM post expense ratio is about 7 per cent.” Target maturity funds are another attractive option today.

PMVVY fact file

• Senior citizens should be of Indian origin and of age 60 years and above to purchase PMVVY
• Maximum investment allowed is Rs 15 lakh per individual
• For the financial year 2022-23, senior citizens can earn 7.4 per cent interest, payable monthly
• The initial investment, capped at Rs 15 lakh, is not eligible for tax deduction
• The pension received is also taxed at marginal slab rate