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With the Kisan Vikas Patra (KVP) set to make a comeback after two and a half years, should you look at the once-popular small savings instrument as a viable investment option? Though the jury is out on this, the considered view is you should skip it.
The consensus among experts is the finance ministry's move to bring back KVP is to draw out unaccounted money and bring it in the ambit of post office savings. Ironically, that was the reason why the scheme was discontinued three years ago, after being panned by committees.
Nihkil Naik of Naik Wealth says since postal savings were out of favour in the last couple of years, the decision to re-introduce KVP is a surprise. "Maybe the government will introduce e-certificates. There could be a strong tracking mechanism for the money invested."
In its earlier form, KVP certificates could be purchased from post offices in cash, in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000. It could be transferred easily. On maturity, it doubled your investment. The maturity period would vary, depending on the rate prevailing. If rates were high, the period could be five years.
In 2011, just before being discontinued, the maturity period for KVP was eight years and seven months. The interest rate was eight-nine per cent, similar to those offered by other small savings schemes such as National Savings Certificates (NSC) or postal deposits. Like NSC, one could use KVP certificates as collateral for loans from banks. However, unlike NSC, KVP was not part of instruments listed under Section 80C, which meant it did not offer tax exemption on investment. Also, the interest was taxable, according to the applicable income-tax slab. So, investors had to calculate tax on the accrued interest ever year.
Therefore, apart from the convenience of investing, KVP doesn't really offer any interest rate benefit or tax advantage.
But KVP was more liquid than NSC — it could be encashed after two and half years of the date of issue, while NSC has a lock-in periods of five years and 10 years.
Prakash Praharaj of Max Secure Financial Planners said KVP was a popular gift. "Due to the convenience of investing, people used to gift money through KVP. But it was also used for bringing black money into postal savings," he added.
