Re-launched Kisan Vikas Patra offers 8.67% per cent interest

Re-launched Kisan Vikas Patra offers 8.67% per cent interest

The re-launched KVP offers 8.67% interest and will double the principal during its maturity period of 100 months.

(Photo: Reuters) (Photo: Reuters)

To increase domestic savings, which fell to 30% of gross domestic product, or GDP, in 2012-13 from the peak of 36.8% in 2008, the government has re-launched Kisan Vikas Patra, or KVP, a small savings scheme it had discontinued in 2011.

The re-launched KVP offers 8.67% interest and will double the principal during its maturity period of 100 months.

Though the investment matures in eight years and four months, one can redeem it after the lock-in period of two years and six months and thereafter in a block of six months by getting a pre-determined maturity value.

KVP certificates will be in denomination of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000. There is no cap on the amount that can be invested.

Initially, the certificates will be sold through post offices. Later, they will also be available at designated branches of public sector banks.

The certificates can be bought singly or jointly and can be transferred to any person/persons multiple times. The facility of transfer from one post office to another anywhere in India is also available. One can also avail of a loan against the certificates.

Investors must note that the interest earned will be taxable. However, tax will not be deducted at source. Besides, the investment is eligible for income tax deduction.

In order to prevent the use of KVP by money launderers, investors will have to follow the know-your-customer (KYC) norms that apply to all national savings schemes.

According to Anil Rego, CEO and founder, Right Horizons, bank fixed deposits have similar risk but are much more liquid. Hence, he will not recommend KVP to investors, he says. Public provident fund, or PPF, can be an alternative to KVP for investors with taxable income if the long tenure of the PPF is not a concern. Post-tax returns from PPF are the best among all small savings schemes.

"One can also consider investing in tax-free bonds and non-convertible debentures with good credit rating. These are offered by companies at higher coupon rates," says Rego.

{mosimage}Investors also have the choice of the National Savings Certificate, which offers a rate of 8.5% for five years and 8.8% for 10 years. This investment, too, is eligible for tax deduction under Section 80C.

Prior to the advent of mutual funds, gold deposit schemes, etc, investing was synonymous with small savings schemes offered by the government. Such was the popularity of these schemes that the percentage share of KVP collections was in the range of 9% to 29% of collections under all national savings schemes.

Until recently 2010-11, gross collections under the scheme were Rs 21,631 crore, which was 9% of gross collections during the year. In the year it was closed, the scheme got Rs 7,575.95 crores (April 2011 to November 2011).

KVP's popularity can be attributed to the safety and security it offered. Investors also liked the returns offered by the scheme, wherein the amount invested doubled during the maturity period of 5 years (the maturity period of the scheme when it was launched), which translated into a return of 13%. According to Rego, investors liked the concept of doubling of money. The government is hoping that this simple positioning will work with investors who are not very evolved this time too. Further, the investor did not have to quote his PAN, which was also an incentive.

However, it was discontinued in 2011 as the government wanted to rationalise small savings schemes. Also, without PAN, there was risk that the KVP will be used for money laundering.