The literal meaning of Kisan Vikas Patra (KVP) is farmer development bond. This name is a misnomer because any individual could invest in this instrument and not only farmers. The proceeds of the bond may be utilized for the welfare of the farmers. This small savings instrument, in its earlier avatar, was quite popular because it was simple to invest in, easy to encash and the yield was good.
The UPA government had withdrawn this instrument because this bearer bond can be misused to park black money and for money laundering. Now the NDA government has reintroduced this instrument with some changes, ostensibly to improve the savings rate and to provide an alternate avenue for investment for the masses compared to, say, gold. Whether the instrument can be a good investment compared to gold or any other financial asset is debatable. Before we do an analysis, we need to learn the salient features of this instrument which is currently sold only at post offices and later on may be made available for sale at banks as well.
- The bond is available for investment to individuals only and not business entities, NRI and HUF. It can be purchased in joint names (maximum two) also and it is a transferable instrument. It can be transferred “N” number of times. It can also be purchased on behalf of a minor.
- It is no longer a pure bearer bond. It requires endorsement and delivery on transfer like an order instrument. It is encashable by original investor or transferee on production of identity slip at the post office where KVP was issued. Initially, the KVP will be issued without the name of the investor. You may need to have a post office savings account which is KYC compliant even though PAN is not required for investing in this bond for large value transactions.The minimum denomination of the bond is ₹1000, and it is also available in denomination of ₹5000, 10000 and 50000. There is no ceiling on the amount that can be invested. Minimum is ₹1000.
- Investment can be made in cash, cheque, bank draft, or transfer from post office savings account. Other than cash and transfer the KVP will have value date of realization of instruments.
- Interest rate is currently 8.7% PA. The interest is subject to TDS, but it is structured in such a way that maturity proceeds are after TDS. There are no tax benefits provided under section 80C like in the case of other small savings schemes: NSC and PPF.
The lock in period is 30 months and can be encashed before maturity thereafter in blocks of 6 months at predetermined maturity value. The maturity values are predetermined.
- In the earlier scheme there was no provision to issue duplicate certificate when original is reported lost. But in the new scheme, one can get an identity slip at the time of investment which helps in getting a duplicate certificate.
- The amount deposited doubles in hundred months. It can be encashed on maturity or after lock in period, only at the post office where it was issued.
- It can be pledged as a security for a loan, as Post Offices are willing to note the lien of the lender.
- Nomination is allowed.
The earlier KVP was popular because there was no KYC and no restrictions on getting maturity proceeds in cash whatever be the amount. It was a bearer bond in the true sense. Money was getting doubled in 103 months without any TDS and no check on tax evasion. The USP of the new KVP is that it is secure, more liquid than say NSC and the interest rate is competitive in the present market. But, is it a good investment vehicle?
Comparing KVP to NSC
Let us compare the new KVP with some of the other investment options under small savings scheme. National Savings Certificate (NSC) is also a long term investment and the interest rates are comparable with KVP. The interest on NSC is subject to tax (no TDS) but the investment (original as well as interest reinvested till maturity) can be offset against taxable income under section 80C unlike KVP. There is no provision for premature closure of NSC. It is not transferable like KVP. KYC is compulsory. So, there are some major pros and cons between the two instruments.
Comparing KVP to PPF
Another small savings instrument to which KVP can be compared is Public Provident Fund (PPF). PPF of course is not a bond like KVP or NSC. It has a maturity of 15 years and every financial year one can invest up to Rupees 1.5 lakhs either in instalments or in one lump sum. Interest is exempt from income tax and the investment amount itself can be deducted out of taxable income every financial year. This is the only instrument which gives complete tax exemption on interest income. PPF cannot be given as security to a loan since it is not a pledgeable security. However, balance at the end of 5 years can we withdrawn as a loan. After lock-in period of 5 years, part withdrawals are also allowed. KYC needs to be adhered to and it is not transferable.
Comparing KVP to FD
Lastly let us compare KVP to a Bank Fixed Deposit (FD). FD scores over KVP in some important areas. Bank FDs are the most liquid. You can close them before maturity at any time at a small penalty. You can take a loan against them at a small mark up over the interest payable on the deposit at any time. You can shop around and get the best interest rates and take an investment decision. You can choose any convenient tenure. Interest payment will be made by the Bank as per your wish, such as monthly, quarterly, semiannually, annually etc. You can make a deposit for 5 years up to Rupees 1.5 lakhs and claim it as deduction under section 80c from your taxable income. But there is a TDS on interest income on fixed deposits. PAN is required, KYC is to be adhered to, and bank deposit receipt is not transferable.
So, whether KVP in its new avatar is an attractive proposition to an ordinary investor? It depends. The main target group for KVP are those who may not have a bank account, and/or confine their dealings mainly to a post office. Such investors feel their money is secure with GOI rather than a finance company or a Bank. KVP will be an alternative instrument for them as money doubles in a specified period and has also some liquidity features, plus transferability. Taxation may not be such an issue as maturity value is less TDS. So ,while it may not be an alternative to gold, it will be an alternative avenue for small investors who are not tech savvy or highly educated. Sometimes it may be a blessing to have a lock-in period as money compulsorily gets invested for at least two and a half years. Plus, this instrument helps people to park their hard earned money for a long term objective like marriage, owning a house etc. If interest rates do fall and banks reduce their deposit interest rates, the yield from KVP will be much higher, mainly because government reacts very slowly to market dynamics and KVP interest will not change in the short term. Therefore it has some attractive features for all.
Another hidden feature is you can invest in KVP without a PAN and the KVP can be transferred multiple times! A good tool for tax manipulation!
So even though many an analyst has been very critical of the success of this instrument, I am quite bullish, mainly because target group is different. This is mainly based on the fact that the target group is not the educated and sophisticated urban investor. The mop up under the scheme is expected to come from the masses who are mainly from the rural and non-bank areas and financially excluded.