The Union Cabinet has doubled the annual investment limit in the Pradhan Mantri Vaya Vandana Yojana (PMVVY) from Rs 7.5 lakh to Rs 15 lakh per annum and extended the scheme till March 2020. The hike and extension had already been announced in Budget 2018. The PMVVY is essentially a fixed deposit with Life Insurance Corporation of India (LIC) although it is branded as a pension. On this deposit, you are guaranteed an interest rate of 8% for a tenure of 10 years.
What is the PMVVY?
The PMVVY although marketed as a pension is essentially a fixed deposit with the Life Insurance Corporation of India (LIC). It is open to people above the age of 60 and guarantees an interest rate of 8% for a period of 10 years. The minimum amount you can invest in the PMVVY (monthly option) is Rs 1.5 lakh and the maximum amount that you can invest was Rs 7.5 lakh. Budget 2018 has hiked this to Rs 15 lakh.
You can surrender the PMVVY prematurely only in case of a critical illness or terminal affecting you or your spouse. In this case, a 2% penalty is charged on your corpus. In case of your death during the PMVVY deposit period, the investment amount is paid to your heirs.
The PMVVY was set to expire on 4th May 2018. The Cabinet has extended the scheme to 31st March 2020, as announced in the Budget.
Contributions to the PMVVY do not carry any tax deduction. The interest on it is also fully taxable. Interest on the PMVVY can be taken monthly, quarterly or annually. On maturity, your principal is returned to you.
The PMVVY interest of 8% looked appealing while interest rates in India were low and heading lower. However, they have reversed course after hitting a bottom in August 2017.
Banks have started raising interest rates. SBI raised rates at the end of March 2018 and HDFC Bank followed suit a month later as we write here. The 10 year fixed deposit rate in SBI is 6.75% for ordinary savers and 7.25% for senior citizens. The rate in HDFC Bank for the same period is 6.5% for ordinary savers and 7% for senior citizens. These rates are about 1% lower than PMVVY but they can head higher in the coming months.
The Senior Citizens Savings Scheme (SCSS) on the other hand, has a higher rate for senior citizens than PMVVY at 8.5%. You can save a maximum of Rs 15 lakh in the SCSS and its tenure is five years which can be extended by another three years. You can read more about it here.
You can also park your money in the Government of India (Taxable) 7.75% Bonds (also known as RBI 7.75% Bonds) for a period of seven years. The interest rate on these instruments, is as the name suggests, 7.75%. These bonds are open to everyone, whether or not they are senior citizens. You can read about these, here.
Given the hike in bank rates and the higher rate on the SCSS, there is scope to undertake a hike in the PMVVY rate as well.