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Should you buy the new Kisan Vikas Patra?
The interest rate of the revamped KVP is lower than that offered by other fixed income products.
However, there are other advantages like greater liquidity and ease of investment.
The new Kisan Vikas Patra (KVP) offers 8.7% interest, which is 30 basis points higher than what its earlier avatar offered. But experts doubt if the relaunched KVP will generate interest among urban investors. There are many fixed income products that offer higher returns compared with the new KVP. The PPF, for instance, offers 8.7% tax-free return. The KVP also offers 8.7% interest (your money doubles in eight years and four months) but the income is fully taxable, so the post-tax return for someone earning more than `10 lakh a year gets pared down to a niggardly 6% (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.
The instrument has been relaunched to channelise household savings and safe guard rural investors from fraudulent schemes. "In the past 2-3 years, the savings rate in India has declined from a record high of 36.8% to below 30% due to the slowdown in the economy. It is, therefore, necessary to encourage people to save more," Finance Minister Arun Jaitley said at the function to mark the relaunch of the KVP. Initially, the certificates will be sold through post offices, but soon they will be made available at designated branches of nationalised banks, Jaitley said.
No ceiling on investment
One major draw 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 the 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 already 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 new KVPs are even less appealing for senior citizen investors. They can get a 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 KVPs. The only disadvantage is the `15 lakh investment limit per individual in the SCSS.
What's good about KVPs
Despite this shortcoming, the KVPs have certain advantages. They offer higher liquidity to investors, allowing them 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 also 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. Though the facility to sell a KVP to a third person injects more liquidity, financial planners fear that financially illiterate investors might lose out if they miscalculate the accrued interest and sell the bonds at a discount. Even informed investors may find it difficult to calculate the true value of a certificate if interest rates move up or down.
On the other hand, 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. In the past 11 months, the prices of many tax-free bonds have risen by almost 25%. Even though prices have increased quite a bit, 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 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. Assuming a yield of 9% and consumer inflation of 7%, the post-tax yield after indexation benefit comes to about 8.3% Financial planners say the new KVPs should appeal to the unbanked population in rural areas. Cheque books and bank accounts are not necessary, while investments and maturity amount can be in cash. The rural population will find these useful, but KVPs are irrelevant for urban investors who have access to regular banking
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