Government re-launches KVP; but is it worth investing?   Nov 19, 2014

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The erstwhile UPA Government based on the suggestion of the Shyamala Gopinath Committee report, discontinued Kisan Vikas Patra (KVP) in 2011 – once a popular investment avenue (offered through post offices in the country) amongst small savers, especially the risk averse ones. The reason cited by the Committee for discontinuation was that it was prone to money laundering being bearer like instruments.

However, the Modi-led-NDA Government has now reintroduced KVP, vide the union budget 2014-15 albeit with a few modifications, to encourage individuals who may have banked and unbanked savings to invest. Moreover, the intent of this move is to raise rate of domestic savings and make effective use of them for building the nation.

Salient features of revamped KVP:
The Government has tried to give a face lift to the old KVP by making it more appealing to investors.

  • Offered through post offices
  • No upper limit on investments
  • Investments can be made in denominations of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000
  • Minimum lock in period of 2.5 years
  • The investor would be able to double his / her money in 100 months (yielding an annual rate of nearly 8.4%)
  • Can be purchased in single or joint name
  • Can be transferred from a person to another multiple times
  • The certificates can be transferred from the one post office to the other
  • Investors will also have an exit option after 2 years & 6 months, and every 6 months thereafter at a pre-determined exit value
  • The certificates can be pledged to avail loans
  • No PAN required. However to allay concerns of money laundering, Know Your Client (KYC) norms is mandatory as applicable in case of other small saving schemes

But unfortunately no tax benefits…
Well thus far, as per Income Tax provisions, investing in KVP does not make one eligible to avail deduction under Section 80C of the Income Tax Act, 1961. Likewise the interest earned from the instrument is taxable ‘under income from other sources' as per the marginal rate of taxation.

So should you invest in KVP?

PersonalFN is of the view that, although KVP is a safe option, the yield per annum earned is not be very attractive if we consider it post-tax. Moreover, if we account for inflation in the return calculation, the real rate of return clocked is further lowered. Therefore we believe that if investors take cognisance of this, it would be tough task for the Government to channelize a huge sum of money through KVP for the development projects. Nevertheless, those who are ignorant of the taxation angle of investing in KVP will always come to the rescue.

Overall we think that, small and risk investors should not depend profoundly on KVP while parking his hard-earned money in pursuit of creating wealth. While you may be risk averse, exploring other investment avenues within debt as an asset class – where you may consider debt mutual funds, debenture and corporate deposits - may be beneficial. You see, while investing in the endeavour of wealth creation it is vital that you follow the prudent asset allocation charted for you (depending on age, income, expenses, existing assets & liabilities, risk appetite and nearness to goal) and diversify well within each asset class keeping you financial goals in mind. Financial planning gives you a road map to your financial goals.

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Jan 07, 2015

I'm relaly into it, thanks for this great stuff!

Nov 19, 2014

Is there TDS in this scheme?
How is the payout ? In cash or as DD or in account?

Nov 20, 2014

Well written.

Added to that, the Fund is enjoyed by the Govt.

Over 100 months, the Time value of Money might get eroded.

Already the interest rate is less.

After 30.9% IT Slab rate (which may increase too, in the coming years), the Net effective yield is abysmally less.

Government in order to encourage Savings, should have exempted the interest earned from IT.

If Income Tax is to be levied, it could have been at 10% flat.

In the absence of concessions, it is not effective avenue for Investment.

Nov 21, 2014

I feel main intention of government in introducing the KVP scheme to help people in rural areas who don't have access to good banking facilities. Hence all the concerns being raised like exemption of income tax or putting a slab on tax are irrelevant for the intended purpose. I doubt how many of those poor people for whom this scheme is intended to come under tax bracket.

Nov 21, 2014

the lower  rate of interest and  without tax benefit, it became not attractive