New KVP norms silent on many fronts

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The re-launched Kisan Vikas Patra (KVP) might add to concerns related to black money, among other issues, say investment experts. The notification on the re-launch of the scheme is silent on whether one will have to furnish his/her Permanent Account Number (PAN) for investing in it. Also, one can transfer KVP certificates multiple times, as was the case earlier. One can also invest in cash, and hence tracing back the source of funds can be difficult. While there are other rules that make it mandatory to provide PAN in transactions beyond certain amounts, there are also ways to get around those.

"The Income Tax Act prescribes the PAN requirement when investments of more than Rs 50,000 are made in instruments such as bank or post office fixed deposits, mutual funds, etc," says Kuldip Kumar, executive director (tax and regulatory services), PwC. However, for those looking at larger investments in KVP, experts say smaller amounts (less than Rs 50,000) can be made in KVP to avoid quoting the PAN. And, holding 200-300 certificates for someone with more than Rs 1 crore to invest might not be difficult.

KISAN VIKAS PATRA 2.0

• Minimum investment should be Rs 1,000upper limit to the amount to be invested
• Certificates can be transferred multiple times
• These will mature in 8 years and 4 months
• Premature withdrawal is allowed, after a lock-in of 2 years and 6 months

Investments can be made in denominations of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000 in the new KVP. By comparison, the earlier version allowed investments of at least Rs 100. There is no upper limit to investments in this instrument.

"The certificates can be issued in single or joint names and can be transferred from one person to any other person/persons multiple times. The facility of transfer from one post office to another anywhere in India and of nomination will be available," says a finance ministry press release.

But there are some experts who see long-term benefits. "There are three readings coming out of the re-launch of KVP: 1) The nation needs savings at any cost, as the savings in the country have dropped; 2) the economy, in addition to foreign funds, also wants to mobilise domestic savings; and 3) it does not want hot money being invested, as this won't be invested for the long term; comparatively, retail money is stable," says Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP.

Should you invest?
"Even in its new avatar, KVP is not compelling enough for individual investors," says certified financial planner Suresh Sadagopan. Though KVP is offering lucrative returns at 8.7 per cent, it does not enjoy any tax benefit. Therefore, it is not meant for those in the 20 per cent and 30 per cent tax brackets, he adds. In the highest tax bracket, KVP will give you 6.09 per cent after tax. By comparison, State Bank of India's fixed deposits maturing in 5-10 years will give 8.5 per cent pre-tax or 5.95 per cent after tax (highest tax bracket). Interest income is taxed at the slab rate even for tax-saving fixed deposits of five years.

National Savings Certificate (NSC) gives 8.5 per cent for certificates maturing in five years and 8.8 per cent for those maturing in 10 years. Here, too, the interest income is taxable - a five-year certificate will give 5.95 per cent, while a 10-year certificate will give 6.16 per cent. Public Provident Fund, which earns 8.7 per cent exempt of tax, is the most attractive among these instruments, though the money is locked in for 15 years and only partial withdrawal is allowed from the seventh year.

The recent past has seen some companies issue tax-free bonds that deliver better returns.