Investing in Kisan Vikas Patra (KVP)
India's finance minister Mr. Arun Jaitley re-introduced Kisan Vikas Patra (KVP) to the investors in what can be termed as, the same product in newer packaging. KVP was discontinued in December 2011 on the recommendation of the Gopinath committee on small savings after it expressed concern over KVP being used to launder black money. Amidst much hype with respect to its recent launch, FM introduced KVP earlier this month with minor changes to its features. So what are these changes and how do does is fare as compared to its peers? Let's check it out..
Key Features & Comparison
The new KVP comes with an interest rate (coupon rate) of 8.67% per annum that doubles the principal amount in 8 years and 4 months. While the previous KVP version offered coupon rate of at 8.41% p.a. that doubled the money in 8 years and 7 months. New KVPs come in the denominations of Rs. 1000, Rs. 5,000, Rs. 10,000 and Rs. 50,000 as compared to its older version that allowed minimum investments even as low as Rs. 100.
Below table exhibits a comparative analysis of key features offered by KVP against other similar fixed income products. (both non-tax efficient as well as tax efficient instruments).
What doesn't work for KVP
Let's say if one invests Rs. 10,000 each in KVP, bank's fixed deposit and long-term income funds (a type of debt mutual fund) – what would be the investment value at the end of 3 years?
The above chart clearly highlights that the bank fixed deposits offers better yield and thus have an upper hand for investors falling in 10% tax slab. However, this will be valid only till the interest rates cycle reverses and banks starts revising its interest rates offered on deposits downwards. While for investors in the higher tax bracket, long-term income funds make it a good buy on account of higher yield that is boosted by better tax treatment on the long-term capital gains. Furthermore, with the expectation on the reversal of the interest rate cycle, long-term income funds stand in a real sweet spot! (However, one has to note that the long-term income funds are subject to market risk and thus carries slightly higher risk than KVP. Thus investors who can digest mark-to-market losses in the short-run should consider long term income funds.)
Inefficiency on the taxation front further makes KVPs an unattractive option as compared to various instruments that provide fixed/stable returns with tax benefits. Let's take an example to understand it better. If one would invest Rs 1, 00,000 in 10-years National Savings Certificates (NSC) and KVP today, his investment value at the end of 8 years 4 months in NSC would be Rs. 2, 05,000 against Rs. 2, 00,000 in case of KVP. On top of it, investment (principal amount only) in NSC is eligible for exemption under section 80C wherein he would additionally save over Rs. 33,000 in tax outgo!
What works for KVP
KVPs are available at all post office branches across India making it easily accessible for the smallest category of investors even in rural areas. The lower lock-in period of 2 years and 6 months as compared to other products likes PPF, provides better liquidity to small investors. Thus, KVPs would be a good option for naïve and small investors staying in remote villages who do not hold a bank account.
The bottom line
The ones who want to save on tax should consider instruments like PPF, NSC, ELSS (equity linked saving scheme) and life insurance based on ones risk consuming ability, liquidity and investment needs as KVP does not provide any tax benefit u/s 80C. While conservative investors having access to the financial markets, should invest in long-term income funds and ignore KVP
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
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8.IDFC Tax Advantage (ELSS) Fund
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10.BNP Paribas Long Term Equity Fund
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