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New LIC scheme: What's in it for you

A N Shanbhag | October 11, 2003

Just how good are the Post Office Monthly Income Scheme and the LIC's newest pension offering. Read on:

Post Office Monthly Income Scheme (POMIS)

In their effort to make POMIS more attractive, the authorities reduced the penalty for premature withdrawals to 3.5 per cent from 5 per cent as per a notice dated September 23, 2003.

There is a lock-in of one year. The penalty is imposed if withdrawals are effected within three years; there is no penalty thereafter.

POMIS is a very popular scheme, especially amongst senior citizens and retired persons.

The interest is 8 per cent, payable monthly and in addition there is a bonus of 10 per cent payable at the end of the term of six years. The equivalent annualised rate works out at 9.66 per cent.

Though this interest is not tax-free, it is covered by Section 80L wherein income from MIS, aggregated with income from other specified sources like bank interest, NSC interest, etc., is deductible up to the ceiling of Rs 12,000. This is the main reason of the popularity of POMIS.

The scheme is so good that the authorities had to peg the maximum deposit at Rs 3 lakh (Rs 300,000) for single accounts and Rs 6 lakh (Rs 600,000) for joint accounts.

In these days of falling interest rates, most people are at their wits' end to find appropriate avenues for investment that offer reasonable safety of capital.

The endemic inflation adds to their woes. Under this backdrop, POMIS does indeed provide some much-needed succour.

However, I am not very enthusiastic about the new changes. This is because any premature withdrawal entails a much higher (hidden) loss than the penalty of 3.5 per cent of the deposit amount.

The investor stands to lose the bonus of 10 per cent of the deposit amount, irrespective of the date of the withdrawal.

Yes, if he effects a withdrawal after the expiry of three years, he does not have to pay the penalty but he certainly loses the bonus.

He loses the bonus even if he withdraws the corpus just one month (or even one day) before the due date.

No other avenue of investment imposes such a heavy penalty.

It is my considered opinion that if the authorities are concerned about the welfare of investors, specially the retired (varishtha) citizens, they should do away with the penalty altogether.

Alternatively, they may retain the penalty but give discounted value of the bonus for premature withdrawals.

This brings me to the next best scheme.

Varishtha Pension Bima Yojana

This scheme was launched on July 14, 2003 by LIC. According to some media reports, LIC had severe and several difference of opinions with the Ministry of Finance relating to operational norms and procedures regarding the scheme.

But that does not give LIC the right to be so slack and neglect to define the structure, particularly the various tax-related aspects of the yojana in its entirety.

SEBI, the regulatory body of mutual funds, not only insists that the offer document be explicit in all the respects but also requires MFs to ratify the same from SEBI before the launch of any new scheme.

I wonder why IRDA is adopting an indifferent, almost disinterested attitude in this regard in spite of the strident protests raised by many financial papers.

One can only draw ones own conclusions from this and hope for the best. I have received several requests from my readers to clarify certain issues related with the yojana.

The scheme has the colour and character of a fixed deposit. The income arising therefrom is essentially interest, though called pension. There does not or did not exist any employer-employee relationship between the investor and LIC.

Also, there are no specific provisions contained in the scheme regarding tax benefits. Therefore:

The pension is fully taxable.

It is not under the shelter of Section 80L of the Income Tax Act.

It does not attract standard deduction. Only salary or salary-related income attracts standard deduction.

There is no TDS. Those who have already invested and started getting the so-called 'pension' have found that it has not suffered any TDS.

Overseas Corporate Bodies debarred

I strongly feel that Indian legislation is an outcome of the 'erase the error' exercise. Face an error and amend the legislation to erase only the error without attending to the related issues.

An OCB means a company, partnership firm, society or other corporate bodies owned, directly or indirectly, at least 60 per cent by NRIs and includes overseas trusts in which not less than 60 per cent of the beneficial interest is held by NRIs directly or indirectly but irrevocably.

AP (DIR) circular 13 dated November 29, 2001 had debarred OCBs from investing in shares and company deposits under the portfolio investment scheme.

This was necessitated because of a large-scale scam perpetrated by some OCBs in those days. The OCBs were allowed to hold their already existing investments till these are sold on the stock exchange.

Also, OCBs could continue to enjoy the facilities of opening and maintaining non-resident accounts as before. The above circular also did not in any way affect the eligibility of the OCBs of making investments through the FDI route.

Now, circular AP (DIR Series) 14 dated September 16, 2003 has de-recognised OCBs as an eligible 'class of investor' in India under various routes and schemes available under FEMA.

This is an outcome of recommendations made by Joint Parliamentary Committee on Security Market Scam.

Now, any unincorporated entities and OCBs will not be allowed to make fresh investments in India under various schemes as prescribed by FEMA, either on repatriation or non-repatriation basis.

This includes the 'Foreign Direct Investments' route and also the automatic route. This includes shares, convertible debentures, government securities, treasury bills, units of mutual funds, deposits, loans, etc.

However, the OCBs may continue with their current holdings till these are sold.

Will the OCBs be allowed to subscribe for rights and bonuses? Obviously not. But this is a travesty of equity and justice. I hope the authorities will undertake one more 'erase the error' exercise.

Granted, there were many OCBs which were misusing this route. However, there were others which were bona fide investors bringing in large investments.

Also, if OCBs are barred today, NRIs will become insecure about being barred tomorrow. This is neither the intention nor the objective of the authorities.

Obviously, the solution does not lie in barring but in instituting a proper, orderly, regulatory framework.

The OCBs did not fall under regulatory framework of either SEBI or RBI. NRIs do.

I submit that instead of blanket barring we should explore the possibility of imposing stricter regulations combined with supervision and reporting obligations on the part of the OCBs.

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