Should you invest in KVP?

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The interest rate of the revamped KVP is lower than that offered by other fixed income products. However, there are other advantages
The new Kisan Vikas Patra (KVP) offers 8.7% interest, which is 30 basis points higher than what its earlier avatar offered. However, experts doubt whether it will generate interest among urban investors. The PPF, for instance, offers 8.7% tax-free return. The KVP also offers 8.7% interest but the income is fully taxable (see table).
The KVP was a popular investment option before the UPA government shut it in November 2011 on the recommendation of the Shyamala Gopinath Committee on small savings. The gross collection for the KVP was over `21,631 crore in 2010-11. The panel had expressed concern that the KVP was being used to launder black money (see box).

It has been relaunched to channelise household savings and safeguard rural investors from fraudulent schemes.

No ceiling on investment

One major drawback of the KVP is that there is no ceiling on investment. However, bank deposits, which also do not have any investment limits, are offering better rates than KVPs. Small private banks, such as Lakshmi Vilas Bank, Karnataka Bank and a few PSU banks, are offering up to 9% on fixed deposits of 8-10 years. Besides, if you have exhausted your annual PPF investment limit of `1.5 lakh, you can earn a better return by putting money in your Provident Fund through the Voluntary Provident Fund. However, the mandate for higher contribution to the PF account can be given only at the beginning of the financial year.

The KVPs are even less appealing for senior citizen investors. They can get higher interest of 25-30 basis points on bank fixed deposits. Besides, the Senior Citizens' Savings Scheme (SCSS) offers them 9.2% as well as tax benefits under Section 80C. The post-tax return in the 30% bracket is higher by 35 basis points compared with that offered by the KVPs. The only disadvantage is the `15 lakh investment limit per individual in SCSS.

What's good about KVPs

The KVPs have certain advantages. They offer high liquidity, allowing investors to redeem the investment after a minimum lock-in period of 30 months. After this period, investors can redeem the certificates at six-monthly intervals. The redemption value at each such period is predetermined. “The KVP will be a bearer instrument just like currency and easy to encash,“ said Jaitley .

The bond certificates can also be kept as collateral for loans. They can be sold to a third person. Unlike fixed deposits and mutual funds, which cannot be easily transferred, the ownership of KVPs can be changed by a simple endorsement.This also makes these a very convenient way of gifting money. However, there's a glitch here.KVPs have to be redeemed at the post office branch where they were issued. The receiver will have to get the bond transferred to another post office if he lives in another town or city .

There's another problem. Experts fear that financially illiterate investors might lose out if they miscalculate the accrued interest and sell the bonds at a discount. The PSU tax-free bonds traded in the secondary debt market offer a better deal to investors because the price factors in the interest accrued till that day. Any change in the interest rate also gets factored into the price. These tax-free bonds are offering a better post-tax yield than that offered by the KVPs to investors in higher tax brackets. Besides, there is the possibility of capital gains if interest rates are cut.

Debt funds a better deal

For more evolved investors, fixed maturity plans (FMPs) and debt funds can be the best way to invest in debt. Debt funds are more tax-efficient because they are treated as capital assets and taxed at a lower rate after three years. The investor can also avail of the indexation benefit if the holding period exceeds three years. Indexation takes into account consumer inflation during the holding period and, accordingly, adjusts the buying price of the investment. In times of high inflation, the indexation benefit can reduce the tax to almost nil.

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