New KVP: What you need to know

Finance minister Arun Jaitley on 18 November relaunched Kisan Vikas Patra (KVP)—the small savings scheme that was discontinued in 2011. It was first launched on 1 April 1988, with a maturity period of five years and six months. The product is being relaunched to provide an easy instrument of saving to those who don’t have access to other such instruments and have to, therefore, go with cash or buy gold and silver.

The finance minister had stated in the budget in July that he wanted to re-introduce the product. “KVP has been reintroduced to give direction to the money lying idle in the bank or in form of cash, both banked and unbanked savings,” reiterated Jaitley at the launch in New Delhi. He also said that domestic savings rate had fallen to below 30% and hence it was important to encourage domestic savings. The media campaign for KVP was also started on Tuesday.

What is KVP? Should you invest? Read on to find the answers.

What’s on offer?

KVP is a fixed-income, long-term and risk-free government-run product. The minimum investment amount required to start with is 1,000. Earlier, the minimum was just 100. In the new version, you can only invest in the denominations of only 1,000, 5,000, 10,000 and 50,000. This means you can’t invest, say, 1,500, or 2,500, or 5,500. If you want to invest, say, 60,000, you will have use a combination of, say, 10,000 and 50,000. There is no maximum limit. The new tenor for KVP is eight years and four months. Earlier, the maturity period was a little longer—eight years and seven months.

Investments in KVP will be doubled in 100 months. However, there are no tax benefits.

Premature withdrawal is allowed after the lock-in period of two years and six months is over, or in case of the holder’s death.

After lock-in period is over, you can withdraw any time but conditions apply. First, you can withdraw only a pre-determined amount. And second, the interest will apply for six-month tranches. For instance, if you withdraw the money in, say, three years eight months, you will get the interest that applied to a three-year six-month period.

You can also avail a loan against it, but the amount will vary across banks. For instance, if you pledge KVP that’s completed two years but less than three years, then Allahabad Bank will give 90% of the face value.

One can invest in KVP either as a single holder or as a joint holder. You can also purchase the product on behalf of a minor child. KVP can be transferred to any other person multiple times. You will be allowed to transfer from one post office to another, and can also change the nomination. As of now, you can buy KVP from any post office or from an authorized agent. To invest in the product you will have to do submit know-your-customer (KYC) related documents, which include a photo identity proof (such as passport or voter’s identity) and address proof.

If you invest more than 50,000, you will also have to submit a copy of your Permanent Account Number (PAN) card. In case you invest more than 10 lakh, you will also have to submit documents that show the source of funds.

The government plans to make KVP available through designated branches of nationalized banks as well. These banks are likely to be the ones that already distribute Public Provident Fund.

You can only invest in the physical form and, hence, need to visit a post office. As of now, the product is not available online.

Calculating returns

As the maturity period of the product has now been reduced to eight years and four months, the returns are slightly higher at 8.67% (it was 8.25%).

Do remember that KVP is essentially meant for those who don’t have access to any other savings vehicle, and that there are better products available. “This is for people who have no access to other asset classes and come under the lower end of the economic spectrum. In a sense, it is comparable with bank fixed deposits. However, as of now, many banks are giving better returns (on fixed deposits),” said Suresh Sadagopan, a Mumbai-based financial planner.

With no taxation benefit, KVP doesn’t work for those in the higher income group. On maturity, the interest income is taxed at your marginal rate. So, if you are in the highest tax bracket of 30.9%, the effective rate of return will be 5.99%. If you are in the 20.6% and 10.3% tax brackets, the effective returns will be 6.88% and 7.78%, respectively.

“This product works for only those who either come in the no tax or low tax bracket and also for those who can’t easily access banks,” said Surya Bhatia, a Delhi-based financial planner.

Hence, if you have access to other fixed-income financial products, stay away from KVP.