Varishtha Pension Yojana: Will the existing scheme cannibalise it?

Sometimes FMCG (fast-moving consumer goods) companies deliberately introduce a product that competes with its own---a new variant of a toothpaste or body soap for example. Marketing gurus fret about the cannibalisation effect of such competition from within---old and new products competing with each other. But in the same breath they also rationalise such seeming contradiction---product differentiation on the touchstones of quality and price, with premium and normal products designed to cater to high-end and low-end customers respectively.

Something similar is happening on the senior citizens pension front. There already exists a senior citizens small savings scheme under which senior citizens aged above 60 can park their savings upto Rs 15 lakh for five years and earn the prescribed rate of interest which presently is 8.5 percent per annum. The scheme is operated through select branches of Indian Post. The newly announced Varishta Pension Yojana 2017 however would be operated by the state-owned insurance behemoth, Life Insurance Corporation of India. To be sure, they overlap with each other in the sense both cater to the same investing class---senior citizens but there are the following vital differences:

1. The extant one has a cap of Rs 15 lakh whereas the new one doesn’t have any which is rather curious given the fact the Prime Minister Narender Modi on the new year eve in the immediate aftermath of demonetisation said the maximum limit that can be invested by a senior citizen under the new scheme would be Rs 7.5 lakh that would translate into a pension of Rs 5,000 per month if one uses the scheme to the hilt and opts for monthly interest.

Representational image. Thinkstock

Representational image. Thinkstock

2. The lock-in period under the extant scheme is five years whereas under the new scheme it would be ten years.

3. The rate of interest under the new scheme is immutable at 8 percent for ten years, period while the one under the extant scheme is variable though at present 8.5 percent and hence scores over the former.

It appears that the new scheme would arouse the interest of only those who have more than Rs 15 lakh to spare because on Rs 15 lakh they can in any case get a slightly higher rate of interest i.e. 50 basis points or half percent. Anything over and above Rs 15 lakh might find its way into the new scheme of course. It is however doubtful if there would be too many senior citizens belonging to this category.

Banks of course would be hit hard by the new scheme. To wit, the State Bank of India pays as it is 7 percent on deposits by senior citizens for maturities ranging from five to ten years. There might be a wholesale shift from banks to the LIC operated scheme unless banks rise to the bait and raise the rate of interest which won’t be easy in a milieu of falling bank rate. Banks too do not impose a cap on fixed deposits, and thus are on all fours with the new LIC scheme.

Has the government deliberately deviated from what the Prime Minister stated----cap of Rs 7.5 lakh? It is entirely possible it might have thought that this latitude is necessary to withstand in-house competition from the existing Post Office scheme. This might encourage young tax planners to be more deferential towards senior citizens----youngsters in the family might be tempted to invest through their elders with an eye on an attractive rate of return. Senior citizens enjoy an extra Rs 50,000 tax-free income vis-à-vis others and very senior citizens are not bothered with income-tax on their first Rs 5 lakh of income.

Besides, gifts to parents and grandparents do not attract the clubbing provisions of the income-tax law i.e. the income from the gifts recoiling, as it were, on the youngsters. They must however worry about the elders being burdened with income-tax on cash gifts in excess of Rs 50,000 per annum. Therefore more the senior citizens in the family, the merrier for the youngsters.

And look carefully at the current income levels of the seniors vis-à-vis their tax exemption limits before gifting them. While Rs 50,000 per senior citizen is a safe rule of thumb, the limited window kept open by LIC would be a handicap. Start with Rs 50,000 during 2017-18 and follow it up with another Rs 50,000 in 2018-19 before the scheme closes. Thereafter pray for government to change its mind and extend the scheme or better still make it permanent.


Published Date: Jul 24, 2017 06:23 pm | Updated Date: Jul 24, 2017 06:23 pm


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