The government has relaunched India Post’s popular small savings investment, the Kisan Vikas Patra (KVP), to mobilise household financial savings, which fell to 7.1% of GDP in FY13 from 12% in FY10. The scheme was disbanded on December 1, 2011, as per the recommendations of the Shyamala Gopinath Committee (former deputy governor of RBI) on Comprehensive Review of National Small Savings Fund, over concerns that the certificates might be used to get black money into the system.
The certificate, in the form of a bearer bond, will be a fully secured instrument and can be encashed after a lock-in of 30 months. Initially, the certificates will be sold through post offices and, later, one can buy them at designated branches of state-owned banks. The amount invested will double in 8.4 years or 100 months, which means the effective annual interest rate will be 8.7%. However, unlike other small savings such as the National Savings Certificate (NSC) and Public Provident Fund (PPF), there is no tax benefit in KVP. There is no upper limit for investing in KVPs. A copy of the PAN is necessary if the investment is above R50,000.
Even earlier, KVPs were popular with the unbanked population in rural areas as bank accounts were not required and the maturity amount was paid even in cash. But now investors will have to comply with KYC rules, such as identification and proof of residence, as applicable with all other small savings schemes of India Post.
KVPs are available in denominations of R1,000, R5,000, R10,000 and R50,000, and one can purchase the certificates with cash, cheque, pay order or demand draft. The certificates can be held in either single or joint names. They can be transferred from the Post office or bank from where they are registered to another Post Office or bank. They can also be transferred from one person to another, multiple times. If the certificate is lost, stolen or destroyed, the person can apply for a duplicate certificate after giving an indemnity bond.
Premature encashment of the certificate is allowed after a lock-in of 30 months and thereafter in blocks of six months for a pre-determined maturity value. The certificates can also be pledged as security to avail loans.
At 8.7% annual return, the KVP does not score over other debt products like the Employees’ Provident Fund or Public Provident Fund, especially after tax. However, its advantage is that there is no upper limit, unlike in PPF where one can invest up to R1.5 lakh in a year.
“A risk-averse investor must opt for PPF as it is exempt from tax at all the three stages. Once the limit of R1.5 lakh a year is exhausted, one should invest the rest of the savings in bank deposits, KVPs or NSC,” says Anil Paul, an investment consultant.
In the highest tax bracket, the return from KVP is 6.1% after tax. In NSCs, where interest is taxable, a five-year certificate will give 5.9% and a 10-year certificate will give 6.2% post-tax return in the highest tax bracket. The best post-tax returns are from PPF and EPF — these two schemes are exempt from tax at all the three stages. Investors who are in the lower tax bracket will get higher post-tax returns than those in higher tax brackets (see graphic).
A KVP investor has to consider interest income every year and has to pay tax on it. Analysts, however, say investors should also look at the option of debt mutual funds and even tax-free bonds of public sector companies in the secondary market. After indexation, returns from debt funds can be even higher than those from KVPs.
Unlike other small savings schemes like the PPF, where the interest rate is revised annually based on the yield from government securities, KVP will have a fixed interest rate. If the interest rates come down, investors in KVP will gain as all other debt products are linked to government securities.
The government first launched KVPs on April 1, 1988 and the amount invested doubled in 5.5 years. Before the scheme was discontinued, the invested money used to double in 8.7 years and the interest rate was 8.4%, compounded yearly.
There was no ceiling on the investment and certificates were available in denominations of R100, R500, R1,000, R5,000 and R10,000 in all post offices and R50,000 in all head post offices.
The scheme was very popular among investors. In FY2000, KVPs accounted for close to 30% of gross collections received under all National Savings Schemes (NSS). However, they started slipping from FY05 (13%) and were 9% of all NSS gross collections in FY11. In the year of its closure, between April 2011 and November 2011, the scheme mobilised R7,576 crore.
The two most popular instruments — KVP and Monthly Income Scheme — together accounted for nearly half of total outstandings of small savings at the end of March 2010. However, from December 2011, KVPs were discontinued as the Shyamala Gopinath Committee was of the view that the scheme was prone to misuse (being a bearer-like instrument) and tax-avoidance (because of absence of tax deduction at source).