Kisan vikas patra

Kisan Vikas Patra or KVP is one of the many fixed income financial products offered by the Indian Post Office department. It is a fixed income instrument that offers to double the investment in 8.7 years. Anyone wishing to invest their money at a safe place invest in KVP.

InvestmentYogi looks at its prominent features.   

Risk: No risk involved as investment is guaranteed by the government of India.   

Rate of return: A rate of 8% per annum is offered at present. The interest on KVP is compounded half-yearly. However, with an effective rate of return of 8.41% p.a., KVP does not safeguard one’s investment against high inflation.

 Minimum investment: The minimum investment in KVP is Rs 500. Fresh purchase or additions can be made in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000.

 Maximum investment: There is no upper limit for investment in KVP.    

Is Pre-mature withdrawal allowed? Yes. Encashment of the KVP before maturity is possible but only 2.5 years from the opening of the account. However, one may have to forgo some part of the interest income in case of pre-mature withdrawal. There are 3 scenarios:

1. If pre-mature withdrawal takes place < 1 year from the date of purchase of the certificate -only the face value (but no interest) of the certificate shall be payable.   

(b) If pre-mature withdrawal takes place< 1 year but < 2 ½ years from the date of the issue of the certificate - the face value of the certificate together with simple interest (at the specified rate) for the completed number of months for which the certificate has been held, shall be payable.    

(c) If pre-mature withdrawal takes place > 2 ½ years- the amount payable is as specified by the government from time to time.   

How to buy? KVP can be purchased at any of the post offices in India. One can buy through cash, demand draft, or local cheques.   

Who is eligible to invest? Individuals – in their own name or on behalf of a minor; 2 individuals can jointly open a KVP account. There is a further classification when the certificate is issued to Joint holders -
    

Type 'A' - maturity is payable to both the holders or the survivor.
Type 'B' - maturity is payable to either or survivor.   

NRIs and Hindu Undivided Families (HUFs) cannot invest in KVP.   

Who should invest? Senior Citizens (who do not have taxable income) and those who are risk-averse/conservative but still aim to create wealth over a period of time may consider investing in KVP.       

Taxability: No tax benefits for amount invested as well as interest income earned.    

However, there is no TDS for KVP investment.  KVP is also exempt from wealth tax.  

With respect to taxability, bank 5-year tax-saver deposits are a better option than KVP as they are allowed as deduction under SEC 80C of Income Tax Act, 1961 to the extent of Rs 1 lakh p.a.  

Other features of KVP:

• KVP is sold at face value; the maturity value is printed on the Certificate.

• There is facility to reinvest the amount on maturity.

• KVPs can be pledged as security against a loan to Banks/Govt. Institutions.

• KVP is transferrable – it can be transferred from one person to another person before maturity (on consent in writing of an application to the officer of the Post Office).

• KVPs are encashable only at the issuing Post Office. In the event of the certificate being presented for encashment at any other Post Office the paying Post Office will insist on the identity slip issued to the holder at the time of purchase which should be provided.

• KVP is held physically in the form of a certificate that is issued to the investors by the post office. The option of holding KVP in demat form is not available yet.       

Conclusion: KVP is one of the safest investments and offers considerable liquidity to the investor. Although it does not enjoy much tax benefits, investing in KVP makes sense when the interest rates on bank deposits are low (such as the current scenario). However, one must invest as per one’s risk profile and investment horizon and not be carried away by the percentage of returns offered.