Varishtha Bima Yojana

The policy promises a high return, but a ceiling on maximum investment reduces its
attractiveness
Brought in by the NDA in 2003-04 and later discontinued, the governments pension plan for
senior citizens, Varishtha Bima Yojana, has been re-introduced. The scheme, as earlier, will be
administered by LIC and promises a high 9-9.38 per cent annual return. Re-launched on
Independence Day, the scheme will be open for one year (till August of 2015) for senior citizens
above 60 years of age.
What is the promise?
Varishtha Bima Yojana is a single premium pension policy for senior citizens, with pension
starting to flow in immediately. One can opt to receive the pension either monthly, quarterly, half
yearly or annually.
Based on the frequency in which you choose to receive the pension, there are ceilings on the
maximum and minimum amount of investment.
Say you want a monthly pension, the maximum you can invest under this policy is Rs
6,66,665.
This will give you a pension of Rs 5,000 every month, translating into a return of 9 per cent per
annum. But say you want a yearly pension, the maximum amount that can be invested is only
Rs 6,39,610. This will give you a pension of Rs 60,000 a year a return of 9.38 per cent.
If two or more senior people in a family want to invest jointly in this policy, they can. But
together, their total investment cannot exceed the limits specified. The invested amount (also
termed as purchase price) will be returned on the death of the policyholder or on surrender of the
policy.
Surrender is allowed after 15 years. Upon exceptional conditions such as treatment of any
ailment for self or spouse, an early surrender is allowed and the policyholder will get 98 per cent
of the invested amount.
There is a loan facility under this policy. After three years, a policyholder can borrow up to a
maximum of 75 per cent of the invested amount. Interest on the loan will be adjusted against the
pension amount paid.
Our take
Varishtha Bima Yojana promises a high return, but the ceiling on maximum investment makes it
unattractive.
The pension of Rs 5,000 a month will not be sufficient to support a normal lifestyle, given
inflation in the cost of healthcare and cost of living. Also, with restrictions on surrender of the
policy before completion of 15 years, there is low liquidity under the policy. Further, one cant
claim a tax deduction under Section 80C on the amount invested in the policy and
the pension received will be taxable if the individuals income falls in the tax net.
However, given that this policy promises a high 9.38 per cent annual return, you may consider it.
It can be a part of your pension portfolio to boost overall returns. The other attractive options for
regular income that senior people can look at are the Post Office Senior Citizens Scheme and

bank fixed deposits. For the Senior Citizens Scheme, the interest rate for 2014-15 is 9.2 per cent
per annum. Withdrawals are allowed after the first year with a small charge.
One can invest a maximum of Rs 15 lakh under this scheme. Interest is paid out quarterly.
Contributions to this scheme are eligible for tax benefit under Section 80C up to the ceiling of Rs
1.5 lakh. The term of the deposit is five years. On maturity, one can extend the period of
investment by another three years.
In fixed deposits, banks offer 0.25 to 0.5-percentage point higher rates for senior citizens. One
can opt to receive interest either monthly or quarterly. Note that interest income from bank FDs
and the Post Office Senior Citizen Savings Scheme is taxable.
(This article was published on September 14, 2014)