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 Rs.1,000. Earlier, the minimum was just
Rs.100. In the new version, you can only invest in the
denominations of only Rs.1,000, Rs.5,000, Rs.10,000 and
Rs.50,000. This means you can’t invest, say, Rs.1,500, or
Rs.2,500, or Rs.5,500. If you want to invest, say, Rs.60,000,
you will have use a combination of, say, Rs.10,000 and
Rs.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 Rs.50,000, you will also have to
submit a copy of your Permanent Account Number (PAN)
card. In case you invest more than Rs.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 highes
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.

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