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Tax-free bonds better, stay away from annuities, say experts
March, 14th 2016

Low annuity rates offered by insurance companies are torpedoing Arun Jaitley's 'pensioned society vision'. And due to these low rates, most experts are asking investors to stay away from annuities now.

"Annuity is not the best option available now, because annuity is taxable and rates offered are very low. Things may improve in future if insurance companies increase annuity rates", says Santhosh Agarwal AVP, Policybazaar,com.

As visible from the LIC annuity table, 60-year olds will get annuity of Rs 7,110 if they pay Rs 1 lakh plus service tax to buy 'with return of premium' annuity. Service tax on annuity purchase price reduced from 3.5% to 1.4% in this Budget and considering 1.4% service tax, the yield works out to be 7.01%. This 7.01% 'taxable' annuity is significantly lower than the 'taxfree' 7.64% offered by issues from NABARD and IRFC that are open now.

Tax-free bonds better, stay away from annuities, say experts

You can also buy tax-free bonds from the secondary market that offers better yield than 7.01% (see top yielding tax-free bonds table for more details).

Though the rates offered on 'without return of premium' annuity is slightly better, investors should note that the insurance companies will not return the invested amount to the legal heirs at the death of the annuity holder. In other words, this annuity contains a part of the principal as well. Even then, the rates offered now are not high and as visible from the LIC annuity table, any 60-year old going for this option will get annuity of Rs 9,350 only. Considering 1.4% service tax, the yield works out to be 9.22%, less than 9.3% offered by the senior citizen savings scheme.

"Now, senior citizen savings scheme is a good product and investors should consider parking their first Rs 15 lakh there. However, this kind of anomaly may not be there in future (after the market evolves)", says Manoj Jain, CEO, Shriram Life Insurance.

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