KVP guarantees to double the investment in 100 months or 8 years and 4 months, an annual return of 8.67%.
In order to encourage household savings, Union Finance Minister Arun Jaitley has re-introduced Kisan Vikas Patra (KVP) on Tuesday in New Delhi. KVP is a secured debt certificate which aims to provide easy savings instrument to people who don’t have access to other financial instruments.
Typically, people in rural areas and small towns fall prey to ponzi schemes or end up investing their money in illiquid assets like gold and real estate. Re-introduction of KVP can channelize these money in safe instrument. In his Union Budget speech, Jaitley had said, “Kisan Vikas Patra has been reintroduced to give direction to the money lying idle in the bank or in form of cash, both banked and unbanked savings,”
History
KVP was launched in 1988 having a maturity period of five years and six months. Later, its maturity period was extended to 8 years and seven months.
The scheme was discontinued on 2011 after recommendation of a committee on comprehensive review of national small savings funds.
“Earlier, KVP was used as a source of channelizing unaccounted or black money in cash. No proper documentation was needed at that time to invest in KVP. Also, since there were no upper ceiling, a lot of people had invested cash in KVP. That’s why government had discontinued the scheme in 2011,” said a Mumbai based distributor.
Structure
The certificates of KVP will be issued in denominations of Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum application amount is Rs.1000 and in multiples of Rs.1000 thereafter. Earlier, it was Rs.100. There is no upper ceiling for investment.
KVP certificates are of three types – individual, joint holders and minors.
Premature withdrawal
KVP allows premature withdrawal after a mandatory lock-in period of two and a half years or on death of certificate holder. However, interest will be calculated only in half yearly compounding. Simply put, if investor redeems his/her investment from KVP in three years and four months, he/she will qualify for taking interest rate of only three years.
Who can distribute
Initially, KVP certificates will be distributed by post offices and authorized agents of small savings schemes. In the coming months, banks will distribute KVP.
Documentation
The revamped KVP needs KYC of all the investors. Investors need to submit photo and address proof for KYC. Investors need to furnish a copy of PAN card for investment amount of Rs. 50,000 - Rs. 10 lakh. Above Rs.10 lakh, the investors should have to submit a certificate indicating their source of income.
Effective yield
KVP guarantees to double the investment in 100 months or 8 years and 4 months, an annual return of 8.67%. However, there will be no tax benefits. The interest earned will be taxed at marginal rate of taxation or income tax slab rates.
The effective yield for individual falling under 30.90% bracket would be 5.99%. Similarly, for individual falling under 20.60% and 10.30% tax bracket the effective yield would be 6.88% and 7.78% respectively.
IFAs take
This scheme can create a big difference for IFAs practicing in small cities and towns. Rajendra Prasad Verma of Purnea, a small town in Bihar, said that KVP is one of the sought after products in rural areas and small towns. “Since KVP certificates are government assured guaranteed product, many people would like to invest in it.”
“Though it has no tax benefit, it can give tough competition to bank FDs,” says a Vizag based IFA, Tirupati Rao.