Safe Harbour. Not a clean sweep for new KVP

With the Kisan Vikas Patra (KVP) reintroduced to investors after a hiatus, this small savings scheme has made a comeback with relatively ‘easier’ norms for investing. It also retains much of its older ‘charm’. But should you put in your money in it? Well, maybe not. The PPF and NSC might still be better choices as they offer a better deal, especially on a post-tax basis for those in the higher tax brackets. Of course, for the unbanked and those without PAN numbers, it makes sense to channelise savings into the KVP. Those in the 10 per cent tax slab too can consider putting a small portion in it.

The only major difference in the new KVP is that the investment matures in 100 months (i.e. eight years and four months) instead of the eight years and seven months in its previous avatar. The new KVP can be purchased in denominations of ₹1,000, ₹5,000, ₹10,000 and ₹50,000. You can invest as much as you wish in the instrument, as there are no limits to the amounts that you can park in it. The doubling of the investment in 100 months means that the annual interest rate is around 8.7 per cent. The amount can be pulled out after a minimum lock-in of two years and six months, in case of emergencies.

There is no requirement of a PAN card to invest in the KVP. But the ‘know your customer’ (KYC) norms do apply. You can show any of the specified photo IDs for identification and address purposes.

When normal KYC norms apply (such as while opening FDs with banks), investments of over ₹50,000 require production of a PAN number and when more than ₹10 lakh is parked, the source of funds needs to be specified. It is still not clear if these norms apply in the case of investing in KVP.

You can invest in cash or by cheque and will be given certificates equivalent to the amounts that you have parked. Investments can be made in the name of a minor child as well. The names in the KVP certificates are transferable and so if you want to gift or make over these to someone, you are allowed to do so. Maturity proceeds are also paid in cash or by a cheque. You can also avail of loans against KVP certificates.

Investors have better small saving options compared to the KVP. For one, the instrument does not carry benefits of 80C tax deduction, which options such as NSC and PPF enjoy. Also, on a post-tax basis, KVP’s effective interest rate works out to only 6.1 per cent for those in the 30 per cent tax slab and 6.9 per cent for those in the 20 per cent category. PPF interest on the other hand, is tax–free while only the previous year’s interest on NSC is taxed.

The PPF, a 15-year product, offers 8.7 per cent interest. But it is allowed for deduction under Section 80C for tax purposes and interest and maturity proceeds are fully tax free. It is thus suitable for investors in all tax brackets.

The 10-year NSC offers an interest rate of 8.8 per cent, which is marginally higher than what the KVP offers.

So, the effective interest rate on a post-tax basis works out higher than the KVP, more so if benefits of tax deduction under Section 80C are considered.

Certainly, the interest rates and absence of tax benefits don’t offer any compelling reasons to invest in the KVP. Of course, for those without bank accounts and without a PAN number, this may be a viable option to channelise savings. Those seeking anonymity and seeking to avoid the ‘pain’ of tax deductions at source (TDS) may also wish to park sums in the KVP.

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