Should investors invest in Pradhan Mantri Vaya Vandana Yojana?

Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a Pension scheme declared by the Government of India exclusively to financially aid senior citizens during retirement.

It was on the verge of discontinuance in March 2020, but has now been further extended for a three-year period, thus giving a chance to enlist to senior citizens looking for regular income, security and reasonable returns.

Although the scheme has been extended, it has also been revised in some aspects. The rate of interest has been reduced from 8 per cent to 7.4 per cent and will thereafter be reset every year.

The interest rate offered by PMVVY is fairly attractive relative to other investment options such as small-savings schemes and bank fixed deposits (FDs). The Post Office Monthly Income Scheme (POMIS) offers 6.6 per cent rate of interest whereas most of the banks offer 6.8 per cent rate of interest on FDs to senior citizens and a normal FD rate of 6.5 per cent. Thus, the senior citizens receive a mere 0.3 per cent increment while investing in such deposits.

Another advantage of PMVVY is that it carries a guarantee from Government of India, and is thus, free of credit risk. Moreover, it gives an option to have the pension payable monthly, quarterly, semi-annually or annually while the interest pay-out in Senior Citizen Saving Scheme (SCSS), which is another scheme for senior citizens, is fixed as quarterly with no flexibility.

On the other hand, PMVVY has a longer lock-in period of 10 years compared to SCSS which has a lock-in period of 5 years, but there are exceptions to this clause. Premature surrendering of PMVVY is permitted in a situation where the investor or his/her spouse is suffering from a terminal or critical illness. In such a case, the investor receives 98 per cent of the purchase price.

On the taxation front, interest earned on PMVVY is added to income and is taxed as per individual income tax slab rates. One significant point to note is that PMVVY does not qualify for tax deduction of Rs 1.5 lakh under Section 80C of Income Tax Act, 1961.

Keeping all these facts in mind, the question of the hour is whether one should consider investing in this scheme.

Investing in PMVVY, along with the SCSS scheme can prove to be beneficial to senior citizens falling in lower income brackets. The maximum amount that can be invested in each is Rs 15 lakh, and therefore it is possible to park a total of Rs 30 lakh across both schemes which are providing similar rates of interest.

Though these schemes offer protection against credit risk, they do still carry interest rate risk and re-investment risk. Additionally, it must be borne in mind that unlike FDs, these schemes are not liquid. Hence, an investor with liquidity requirements should consider placing his/her funds in bank FDs or mutual funds instead.