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Published by Hardik Patel

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Published by: Hardik Patel on Sep 28, 2012
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05/13/2014

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S
o, you never gave a serious thought to Kisan Vikas Patra (KVP) as an alternative debt instrument
because you did think that it is only meant for farmers...Didn't you? I’ve also been so busy
promoting PPF that KVP almost escaped attention. But then Purab asked [see: What is right time to buy a home?],
“I have 3 Lakh to invest, how is Kisan vikas patra for mid/long term investment.”
 
Let me rephrase the question
Other than the tax-saving debt instruments available for investments (e.g. PPF, NSC, Bank FDs), which debt instruments can be regarded as good from medium to long term investment point of view?
 
Due to the current low-interest rate regime, small savings instruments have once again started lookingattractive. KVP is also a small saving instrument available at post offices offering a pre-tax return of 8.41% per annum (your money doubles in 8 years & 7 months).
Basic Features:
 
1. Easy to purchase:
Available in denominations of Rs 100, Rs 500, Rs 1000, Rs 5000, Rs 10,000 and Rs50,000. No a/c opening hassles are involved. Just go to a post office fill a form, hand over the cash or
cheque / DD and you’re done. Further there is no limit as to number o
f KVP certificates you canpurchase or maximum amount you can invest.
2. Post-tax Yield:
The interest is taxable on annual basis (although no TDS is involved). The post-taxyield from KVP depends on the marginal tax rate that will be applicable to you.
3. Premature encashment
is possible just after 2.5 years (2 years & 6 months) but it is very costly
seethe table:
Period--------------------------Yield---------------Reduction in Yield
Up to 2.5 years -----------------NA--------------------------NA2.5 years to 3 years-------------6.5%-----------------------1.91%3.5 years to 4.5 years-----------7.0%----------------------1.41%5 years to 6 years----------------7.5%----------------------0.91%6.5 years to 8 years--------------8.0%----------------------0.41%8 years & 7 months--------------8.4%----------------------nil
4. Loan facility
is also available against KVP by pledging it with the bank.
 
Comparison with PPF & NSC:
 No doubt PPF, NSC, Tax-saving bank FDs have an edge over KVPs due to associated tax benefits. Butonce you exhaust your section 80C limit & PPF investment limit, investing in KVP becomes an attractiveproposition.
KVP vs. PPF
PPF maintains its superiority over all other small-saving schemes (even ignoring the section 80C taxbenefit) because the post-tax yield of PPF is substantially higher than all other debt instruments. PPF isthe only debt instrument (other than the EPF), where your interest income is completely exempt.Accordingly the tax-free interest of 8% from PPF is much better than 8.41% taxable interest from KVP.However, if your total income is either nil or less than basic exemption limit, then KVP will score overPPF.Even after implementation of  Direct Tax Code (DTC) which will make the PPF withdrawals taxable,  post-tax returns of PPF will be better than KVP.
KVP vs. NSC
Now, let’s come to KVP vs. NSC. Isn’t NSC a better debt instrument than KVP (even after ignoringsection 80C tax benefit on the amount invested in NSC)? …Let’s see
 
1. Returns:
Yield is 8.40% from KVP as against 8.16% from NSC.
2. Taxation:
First, NSC is one of the eligible instrument u/s 80C i.e., the amount of your incomeinvested in NSC gets exempted from tax. Second, returns of both the instruments are chargeable totax. But unlike KVP, NSC interest is again eligible for deduction u/s 80C. But if your section 80C limit isalready exhausted, then this tax benefit offered on NSC is of no good.
In short, considering tax benefits NSC is undoubtedly better than KVP (Note: there won’t be any more
tax benefit on NSC after implementation of DTC). However, if tax is not the criteria, then KVP returnsare a little better than NSC and with a longer investment period of about 2.5 years.
Comparison with other Debt Instruments:
 Over the last year, returns offered on bank FDs are steadily coming down. At present 5- to 10-yr bankFDs are offering interest in the range of 7.25% to 7.75%.The YTM of non-convertible debentures is also coming down. The following is the maximum YTM of  NCDs issues during last one yearTATA Capital NCD -------------->12%Shriram Transport NCD--------->11.50%L&T Finance NCD (1st issue)--->10.50%L&T Finance NCD (2nd Issue)-->8.58%Although the YTM of 8.58% (accompanied with interest rate risk) on the L&T finance NCD 2nd issue inFebruary 2010 was almost at par with KVP, the duration was 3 years as against almost 9 years of KVP.
 
Coming to medium and long term debt mutual funds, the 5-Yr category average returns are somewherebetween (As on March 2010) 6 and 7 percent with some tax benefit due to tax arbitrage.Moreover, when there are chances of increasing interest rates, it is very risky to invest in long term debt funds.So, due to above reasons, KVPs have started looking very attractive debt instrument offering relativelybetter returns without any risk.
Conclusion:
 
In a nutshell, if you’ve completed your tax savings and are looking for a debt instrument offering
assured good returns combined with safety and liquidity then KVP is a good choice.
In other words, invest in KVP if you’re done with your tax saving investments and further exhausted
your PPF investment limit (including your spouse & children) but make up your mind that y
ou’ll remain
invested till the maturity because if you make a premature exit, your effective yield will beconsiderably lower (the facility of making an early exit can be exercised in an emergency by sacrificingsome returns).
S
o, you never gave a serious thought to Kisan Vikas Patra (KVP) as an alternative debt instrument
because you did think that it is only meant for farmers...Didn't you? I’ve also been so busy
promoting PPF that KVP almost escaped attention. But then Purab asked [see: What is right time to buy a home?],
“I have 3 Lakh to invest, how is Kisan vikas patra for mid/long term investment.”
 
Let me rephrase the question
Other than the tax-saving debt instruments available for investments (e.g. PPF, NSC, Bank FDs), which debt instruments can be regarded as good from medium to long term investment point of view?
 
Due to the current low-interest rate regime, small savings instruments have once again started lookingattractive. KVP is also a small saving instrument available at post offices offering a pre-tax return of 8.41% per annum (your money doubles in 8 years & 7 months).
Basic Features:
 
1. Easy to purchase:
Available in denominations of Rs 100, Rs 500, Rs 1000, Rs 5000, Rs 10,000 and Rs50,000. No a/c opening hassles are involved. Just go to a post office fill a form, hand over the cash or
cheque / DD and you’re done. Further there is no limit as to number o
f KVP certificates you canpurchase or maximum amount you can invest.
2. Post-tax Yield:
The interest is taxable on annual basis (although no TDS is involved). The post-taxyield from KVP depends on the marginal tax rate that will be applicable to you.
3. Premature encashment
is possible just after 2.5 years (2 years & 6 months) but it is very costly
seethe table:

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