Expressing concern for the aged because of considerable fall in deposit interest rates Finance Minister Jaswant Singh in the Budget speech for 2003-04, observed: "In the context of the declining rates of interest, I do take on board the difficulties that are often voiced and could be faced by our senior citizens and others.
"To provide relief to them, the Life Insurance Corporation of India will launch a special pension policy, guaranteeing an annual return of 9 per cent, in the form of a monthly pension scheme.
"This scheme will be called the Varishtha Pension Bima Yojana, through which a pensioner, or any citizen above 55 years of age, could on payment of a lumpsum amount get benefits calculated at 9 per cent per annum.
"For this scheme, and with pensions in mind, any citizen above the age of 55 years of age will qualify, and will get a monthly return in the form of a pension for life. Upon demise, the initial amount deposited will be returned to the spouse/nominee under the policy.
"The minimum and maximum monthly pensions proposed are Rs 250 and Rs 2,000 per month. This monthly pension will start from the month following the payment of the lumpsum amount by the citizen." (Paragraphs 41 and 42)
The scheme has since been launched by Prime Minister Atal Bihari Vajpayee. But because of the long duration (15 years lock-in period) for which the invested amount will remain with LIC and the taxable nature of the pension receipts, the laudable objective will be frustrated in cases of many elderly people covered under the scheme.
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Take the case of a person, say of 60 years of age, in whose case pensionary benefits amount to Rs 160,000 per annum with no other income.
On this income, he will be entitled to standard deduction of Rs 30,000 under Section 16 of the Income Tax Act.
On balance amount, the tax liability will be worked out taking into account the rebate on LIC and provident fund contributions in terms of Section 88 of the Income Tax Act, which in his case will be 20 per cent of the aggregate of the qualifying amount.
If such a person gets, say Rs 24,000 pension from LIC in a year, his tax liability on this pension sum will work out to Rs 5,200, being 20 per cent of Rs 20,000, and 30 per cent on the balance amount of Rs 4,000.
If such a person contributes, say Rs 1,250 per annum to the Public Provident Fund (without taking into account the LIC pension), he will have been entitled to a tax rebate of Rs 3,000, 20 per cent of Rs 15,000, since with the LIC pension, his income will exceed Rs 150,000, his rebate will get reduced to Rs 2,250.
Thus there will be a tax loss of Rs 750 because of the application of the rate of 15 per cent -- the income being above Rs 150,000.
Hence, the tax liability consequent to investment in the LIC pension scheme for such a person will work out to Rs 5,950 (Rs 5,200 of Rs 750). It will give a return of 6.7 per cent on the amount invested.
In the case of a person who is receiving income from sources other than salary/pension, the tax impact will be still higher because in that case, he will not be entitled to standard deduction and hence Rs 24,000 received from the LIC would get subjected to tax at the maximum marginal tax rate of 30 per cent (applicable on incomes exceeding Rs 150,000 and hence the tax on the extra income of Rs 24,000 will work out to Rs 7,200. (Since the pension will not be received from the employer, there will be no standard deduction for this pension.)
Adding to this the rebate loss of Rs 750, the total tax liability will be Rs 7,950, yielding a net return of Rs 16,050 on an investment of Rs 266,670, which will give a return of just a little above 6 per cent after tax.
Will such a person like to go in for the scheme is the moot issue. Keeping in view the fact that RBI Bonds are available on an interest of 6.5 (tax-free) per annum with the further benefit that the investment in these bonds can be retrieved after 3 years, the pension scheme will provide no incentive for investment.
In the case of senior citizens, the pension amount will be taxable at 30 per cent if their income exceeds Rs 153,000 (Rs 183,000 in the case of pensioner).
The reduction of Section 88 benefit by 5 per cent will also be there for senior citizens. Hence for such people also the attraction to invest in the pension scheme will not be there because of the post-tax low yield.
It is not clear, at present, whether on pensions exceeding say Rs 5,000 in a year (as in the case of interest), there will be tax deduction at source also. If it is to be so then this will be a further disincentive for putting in money in the LIC pension scheme.
The finance minister in paragraph 42 of the Budget speech has said "the difference between the actual yield earned by the LIC on funds invested under the scheme and the assured return of 9 per cent will be reimbursed to the LIC annually by the government".
This will entail financial burden on the government without the beneficiaries being benefited to the desired extent.
If the scheme is really intended to serve the purpose for which it has been conceived of, namely, to help the aged in the absence of a comprehensive social security scheme, to get some more income to make up for the loss in their earnings consequent to deep fall in interest rates and make the scheme attractive the following changes in the scheme seem imperative:
- The lock-in period should be reduced to 5 years;
- The pension income should be made tax exempt; and
- If it is not possible to make the receipt exempt from tax, the pension receipts should be subjected to tax at a lower uniform rate of 10 per cent on the gross amount.
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