The Centre is likely to grant tax-free returns on Varishta Pension Bima Yojana, which offers 9 per cent interest rate for senior citizens in the 53-79 age group.

The Union Minister of State for Finance (banking, insurance & expenditure) Anandrao Vithoba Adsul said on Saturday that the government is considering making returns on the scheme tax free.

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If implemented, it will be a great boon for senior citizens who today enjoy zero tax liability plus exemption from tax deducted at source, where gross annual income amounts to Rs 153, 000.

Tax levied on returns from Varishta plan will effectively bring down the rate of assured return, in accordance with the tax rate.

Today, income received from all pension schemes is taxable in the hands of the receiver. The Centre's view to make an exception in this case -- as the scheme is targeted solely at senior citizens and subsidised to offer them 9 per cent guaranteed monthly returns -- will mean that policyholders will be able to realise the full yield of 9 per cent.

Today, assuming that the retiree (senior citizen) is in the income bracket where he pays tax at 20 per cent, the effective yield from investment made in Varishta Pension Bima Yojana will be 7.2 per cent (considering a 20 per cent tax on the 9 per cent returns).

The plan, which was launched by the prime minister on July 14, has mopped up investments in excess of Rs 150 crore (Rs 1.5 billion) in the first week of launch.

There have, however, been representations made by a cross section of senior citizens that the returns are not as attractive as made out to be on account of the tax being levied.

In the case of the Universal Health Plan, which was also launched on July 14, the government has notified that no service tax will be payable on the premium.

This was necessary since the scheme was targeted at the poor and those living below the poverty line to ensure they have proper healthcare facilities and insurance coverage.

A notification was gazetted stating that the central government is satisfied that it is necessary in public interest to exempt service tax on the universal health scheme.

This proved necessary since the premium for the universal health scheme works out to Rs 365 per individual at Rs 1 per day, Rs 548 for a family of five and Rs 730 for a family of seven.

"Levying service tax at the current rate of 8 per cent would have meant a higher premium cost," S K Mahapatra, secretary, General Insurers' Public Sector Association, said.