Kisan Vikas Patra

  

WHAT IS KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) is a post office small savings scheme that was originally introduced by India post in 1988. It was then discontinued in 2011 as it was being misused by money launderers and was reintroduced in 2014 with required amendments and was in force ever since.

This scheme was originally introduced for farmers to help them save money and inculcate a sense of financial discipline in them hence the name is based on farmers. Now, the scheme is opened for the general public.

It promises investors to double their investment on maturity i.e. 124 months.

 

 

WHAT ARE THE TYPES OF KISAN VIKAS PATRA (KVP)?

The following 3 types of KISAN VIKAS PATRA (KVP) are available to investors.

• Single holder type certificate – This certificate is issued to an adult individual or on behalf of a minor or a minor.

• Joint A certificate – This certificate is issued jointly to two adults, payable to both the holders jointly or the survivor.

• Joint B certificate – This certificate is issued jointly to two adults, payable to either of the holders or the survivor.

 

 

IMPORTANT POINTS TO NOTE ABOUT KISAN VIKAS PATRA (KVP)

The following are some of the important features of the KISAN VIKAS PATRA (KVP) that every investor must know.

1. Investor’s profile – It is best suited to investors who want to lock-in funds for a specific tenure at a fixed rate with negligible risk. It is not suitable for long term investing beyond 5 years since its returns are restricted. Equity mutual funds on the other hand can generate much better returns in the long term.

 

2. Risk – KISAN VIKAS PATRA (KVP) is considered to be one of the safest investments as it has a sovereign guarantee of the government and involves zero risk of default and interest rate fluctuations.

 

3. Liquidity – KISAN VIKAS PATRA (KVP) is considered low on liquidity as the amount invested can only be liquidated on maturity. However, accessing funds during emergencies is possible since it can be broken pre-maturely after paying the penalty.

 

4. Taxation – Income earned from this scheme is fixed and treated as income from other sources. Hence, investment proceeds received on maturity is added to total income and taxed as per the applicable slab.

Also, the amount invested in KISAN VIKAS PATRA (KVP) does not provide any tax benefit.

 

5. Volatile – KISAN VIKAS PATRA (KVP) involves minimum volatility since most of its assets are invested in government securities and AAA-rated corporate bonds.

 

6. Time horizon – This scheme matures in 10 years and 4 months and has a lock-in of 2 years and 6 months.

 

7. Regular Income – KISAN VIKAS PATRA (KVP) does not provide any regular income as the interest earned gets accrued and paid with the principal on maturity.

 

8. Returns – It offers fixed returns in the range of 7% to 8% per annum in the form of interest.

 

9. Asset class – It is a pure debt product.

 

10. Cost – KISAN VIKAS PATRA (KVP) does not involve any cost of investment except penalties for breaking it prematurely.

 

10. Loan facility – To avoid loss of interest and save the pre-closure penalty, investors can avail loan against the certificate issued under KISAN VIKAS PATRA (KVP) scheme.

 

 

WHO CAN AND CANNOT INVEST IN KISAN VIKAS PATRA (KVP)?

Any Resident Indian above 18 years of age or “Trust” can invest in KISAN VIKAS PATRA (KVP). An adult Indian Resident can invest on behalf of “Minor”.

Hindu Undivided Family (HUF), Non-Resident Indians (NRI), Co-operative banks and societies are not allowed to invest in this scheme.

 

 

MINIMUM AND MAXIMUM INVESTMENT

An individual can avail of a KISAN VIKAS PATRA (KVP) certificate with as low as Rs. 1,000/- which does not have any upper limit however, PAN card is mandatory for every investment above Rs. 50,000/-.

Investors are not obligated to make any further contributions to this scheme. However, they can choose to invest more if they desire.

Currently, certificates are available in denominations of Rs. 1,000/-, Rs. 5,000/-, Rs. 10,000/-, and Rs. 50,000/-. 

 

 

WHERE IS YOUR MONEY INVESTED?

Due to its conservative nature, KISAN VIKAS PATRA (KVP) primarily invests all its assets in fixed return instruments like government securities, government and corporate bonds, etc.

 

 

HISTORICAL DATA OF RETURNS IT GENERATED

 

 

ACCESSIBILITY OF FUNDS AND LOCK-IN, IF ANY

KISAN VIKAS PATRA (KVP) matures in 10 years and 4 months with a minimum lock-in of 2 years and 6 months. However, it allows its investors to make premature withdrawals subject to conditions and penalties as stated below:

• If funds are prematurely withdrawn within 12 months of opening an account then the investors are not eligible to receive any interest on the amount withdrawn. Also, they are liable to pay a penalty as specified under scheme guidelines.

• If the premature withdrawal is done between 12 months and 30 months of opening the account then there is no penalty involved but the interest will be paid at a lower rate than normal.

• Any amount can be withdrawn without penalties and reduction of interest on completion of 30 months in the scheme.

 

LOAN AGAINST KISAN VIKAS PATRA (KVP)

Investors can take a loan against KISAN VIKAS PATRA (KVP) certificate if they meet the below criteria.

• The certificate is in their name.
• The funds will not be utilized for any speculative activities like gambling, horse race etc.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) offers the following benefits to its investors.

1. Protection from market volatility – Since KISAN VIKAS PATRA (KVP) is a debt instrument and provides a fixed return on investment that keeps you protected from market volatility.

 

2. Safe – Since KVP enjoys a sovereign guarantee from the government, it is the safest option with guaranteed returns and carries zero risk of principal loss.

 

3. Protection from interest rates volatility – Though interest rates in the case of KVP reset every quarter, it has a bearing on a new account only that opens after that. All the existing accounts continue to enjoy the same rate that was offered to them at the time of signing up. This helps its subscribers and protects them in case of a falling rate scenario.

 

4. Low investment amount – One can start investing in KVP with as low as Rs. 1,000/- with no further commitment.

 

5. No commitment – Unlike PPF, the investors of KISAN VIKAS PATRA (KVP) are not obligated to make any yearly payments to keep the account active. They can contribute to this scheme how much ever and whenever they want to.

 

6. No age restrictions – Anyone above 18 years of age can invest in this scheme as that is no restriction concerning the maximum age of the investor.

 

7. Zero cost of investment – KISAN VIKAS PATRA (KVP) does not involve any cost of investment hence, all the returns generated go into the pocket of the investor after tax deduction.

 

8. Easy access to funds during hard times – Though premature withdrawals are subject to penalties, there are no conditions involved and the process is very simple.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) has the following limitations.

1. Lock-in – KISAN VIKAS PATRA (KVP) involves a lock-in of 2.5 years. Though premature withdrawal is allowed, it is subject to penalties.

 

2. Returns low enough to beat inflation – KISAN VIKAS PATRA (KVP) offers lower returns as compared to other fixed-income instruments like bonds, liquid funds, debt funds, fixed maturity plans, monthly income plans etc. Returns generated by KVP  are not even good enough to beat inflation.

 

3. Tax inefficient – It is one of the most tax-inefficient forms of investments as the entire income earned is added to the total income and taxed according to the applicable tax slab.

 

4. Poor returns during rising rate scenario – Interest rates that prevail at the time of opening the account becomes fixed for the rest of the tenure. Hence, any upward or downward movement in the market rates has no impact on the rates of existing subscribers. This feature can make KVP look less attractive to its investors during the rising rate scenario.

 

5. Loss of opportunity during the market boom – The objective of KISAN VIKAS PATRA (KVP) is to offer a fixed return on investment to its investors due to which its exposure to equities is restricted. This prevents its investors to benefit from the upswing of the market boom.

 

 

WHO SHOULD CONSIDER INVESTING IN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) is most suited to the following investors:

1. Risk-averse investors – Since KISAN VIKAS PATRA (KVP) is a fixed income product and offers assured returns, it is best suited to risk-averse investors who are ready to compromise on returns but not on safety.

Since it is backed by the government, it also involves zero risk of default. Investors with low liquidity needs and having enough exposure to equities can invest in KISAN VIKAS PATRA.

 

2. Senior Citizens – Individuals above 60 years of age who are not willing to take any risk of market fluctuations and want to earn guaranteed returns.

 

3. Investors with low debt exposure – KISAN VIKAS PATRA (KVP) is a debt product hence, investors with high equity exposure who are looking forward to creating a debt portfolio can consider this option. It can be a very good option for them to diversify and create a retirement corpus.

 

4. Investors looking for guaranteed returns – Investors looking for guaranteed returns as compared to other debt instruments and can stay invested for a minimum of 2.5 years can consider investing in KVP.

 

 

WHO SHOULD AVOID INVESTING IN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) may not be the best investment for the following investors:

1. High-risk-takers – KISAN VIKAS PATRA (KVP) is a low risk-low returns investment. Young investors especially below 35 years of age, who have age by their side and can take higher risk to earn much better returns by investing in equity mutual funds or direct equities.

 

2. Investors in higher tax slab – Investors who fall under a higher tax slab of 20% or more as the interest earned is treated as the “Income from other sources” and the entire interest earned is added to their taxable income and taxed as per the applicable slab.

 

3. Investors looking for regular income – NATIONAL SAVINGS CERTIFICATE (NSC) does not generate regular income for its investors. All the interest earned is accrued and paid with principal upon maturity.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN KISAN VIKAS PATRA (KVP)

KISAN VIKAS PATRA (KVP) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Diversify your investments – Returns from the KISAN VIKAS PATRA (KVP) are fixed, not linked to the market and may or may not be able to beat inflation year on year consistently. Hence, instead of investing all your money in this product, you can also consider diversifying your investment in other market-linked products like balanced mutual funds or bonds issued by the Government of India.

 

2. Understand the product and the risk involved – KISAN VIKAS PATRA (KVP) involves 2.5 years lock-in. Hence, investors should be aware of all pros and cons of the investment they are getting into. The amount required on maturity, liquidity needs, risk appetite, etc. should be carefully evaluated before signing up for this scheme.

 

3. Update nomination details – Updating nominee details at the time of opening the account is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN KISAN VIKAS PATRA (KVP)

KISAN VIKAS PATRA (KVP) investors must avoid taking the following actions while investing to protect their investment from losing its value.

1. Breaking it prematurely – Do not invest in KISAN VIKAS PATRA (KVP) if you need the funds before 2.5 years. Breaking it prematurely will lead to penalties. Instead, one can explore loan options against KVP.

 

2. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) investors should be mindful of following risks involved in this investment:

1. Inflation Risk – Though KISAN VIKAS PATRA (KVP) ensures the highest level of safety of principal and give assured returns, it may or may not be able to beat inflation year on year since it is not market-linked. The average rate of inflation is around 6% - 8% per annum whereas net returns generated from this scheme can go below 6% or even lesser. This may lead to shortfall when you look at the corpus you created in meeting your financial goals.

To reduce the risk, you can consider investing partially in through SIP.

 

2. Liquidity Risk – KISAN VIKAS PATRA (KVP) can only be liquidated after 2.5 years without penalty. In case, someone needs to liquidate it before maturity, they need to break it prematurely with a penalty. Hence, anyone looking forward to liquidating their investment before maturity should consider investing in debt mutual funds or liquid funds.

 

 

TAXATION (BENEFITS, TAX EFFICIENCY AND TDS)

KISAN VIKAS PATRA (KVP) is one of the most tax-inefficient investments as the entire interest earned is added to your total taxable income and taxed according to the applicable slab.

The amount invested in this scheme is not eligible for tax benefit either.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN KISAN VIKAS PATRA (KVP)?

KISAN VIKAS PATRA (KVP) can be beaten by the following products on various grounds.

1. From a safety point of view – KISAN VIKAS PATRA (KVP) is supreme and is considered to be the safest than any other debt-oriented instrument as the returns it generates are fixed and there is no risk of principal loss as well since it is backed by the government.

 

2. From the returns point of view – Balanced funds generate better returns than KVP as they also participate in the equity market.

Equity mutual funds, on the other hand, generate even better returns in the long run however, it carries a higher risk of principal loss as they invest directly in the stocks of various companies.

If someone has an even higher risk appetite is looking for even better returns then they can invest in or of various companies.

 

3. From a liquidity point of view – KVP involves a pre-defined maturity period and breaking it prematurely attracts penalty. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates better post-tax returns but also offer higher liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED?

The process of investing is also as simple as understanding the scheme.

• If you are investing by yourself then submit a duly filled and signed Form A to your nearest post office or designated bank. In case, an agent is involved then Form A1 is supposed to be used.

• Once the form is filled, attach your self-attested “Know your customer” documents that include your photo, pan card and any government-issued document containing your present address like passport, Aadhaar card, voter ID card etc.

• Then make a deposit by cash, cheque or pay order. If a deposit is made by cash then you will immediately receive the certificate otherwise it will be issued post clearance of the cheque.