Kisan Vikas Patra is a small saving product just like the National Savings Certificate (NSC) or the Public Provident Fund (PPF).
Opening up a new avenue of investment for small investors, the government this week re-launched the Kisan Vikas Patra. Widely popular in the 1990s , the KVP is a small saving product just like the National Savings Certificate (NSC) or the Public Provident Fund (PPF).
At the time, it was largely considered as an avenue for those who did not have access to other saving schemes but now it can be an interesting option for small investors, especially when other options such as gold has lost much of its shine with the various curbs on its import.
Moreover, while equity markets that are on a record high at present, are a good investment bet, every investor’s portfolio should be diversified to take care of risks.
The scheme is also a new option for investments when the government has increased the tax saving limit under Section 80 C of the Income Tax Act, 1961 by Rs 50,000 to Rs 1,50,000. There is however no upper limit on investments into the scheme.
Underlining its attractiveness, finance minister Arun Jaitley, who had launched the KVP said, “It would help poor gullible investors to channelise their savings towards trusted government scheme instead of some ponzi schemes.” KVP can also be used as security and pledged for availing loans.
The KVP, unlike whast its name suggests is not just limited to farmers but is open to all small investors. It will available to the investors in the denominations of Rs 1,000, 5000, 10,000 and 50,000 and can be purchased at present from post offices. It will also be available at designated bank branches at a later phase.
Investors will have to provide Know-Your-Customer (KYC) details on the lines of other small savings schemes, which is based on their risk profile or investment amount. A Permanent Account Number of the investor will be required in case of transactions over Rs 50,000.
According to norms issued, KVP would be in the form of a bearer bond. The certificates can be issued in single or joint names and can be transferred from one person to any other person, multiple times. The facility of transfer from one post office to another anywhere in India and of nomination will be available.
The product shows a slight difference with regard to its interest rate. Unlike other small savings schemes, where the interest rate is now revised annually from April 1 based on market rates, the KVP will have a fixed interest rate.
While it promises to double the investment amount in 100 months, its interest rate works out to about 8.5 per cent annually. This is indeed lower than the return offered by comparable small saving schemes such as the PPF which has an interest rate of 8.7 per cent and the 10 year National Saving Certificate that has an return of 8.8 per cent.
“Right now there is not much clarity on the KVP, especially in the kind of rates they have quoted. Compared to returns on fixed deposits, senior citizen bonds, it is not all that attractive,” pointed out Hemant Beniwal, director, Ark Primary Advisor.
However, finance ministry officials contend that from 2015-16, the return on the KVP will seem more attractive compared to other small savings products. “Interest rates in the bond markets are going down. This will translate into lower returns even for small saving products next fiscal,” said an official, adding that this is when the KVP will shine through.
In terms of tax benefits, investments up to Rs 1,50,000 annually will qualify for tax rebate. The interest income at the time of withdrawal will however be taxable.
The KVP also has a flexible liquidity system, which makes it more liquid than the NSC or the PPF which have strict lock in periods. While the KVP has a maturity period of eight year and four months, investors can encash their certificates after the lock-in period of two years and six months or any time after that in any block of six months on pre-determined maturity value.