Interest Rate
KVP offers 8.7% taxable returns. If you compare this with any commonly available Fixed Deposit, it will be anywhere in the range of 8.75 to 10% (also taxable). So, if you have a bank account and can get a Fixed Deposit (FD) done, there is no attraction of KVP as far as interest rate is concerned. Post Tax Returns from other Debt based instruments like PPF, EPF and MFs are far higher.
Taxability
Interest earned via KVP is fully taxable. This is the biggest drawback of the KVP on date. On the other hand, interest earned through other debt based instruments like Debt MFs are either very low or EPF/PPF where the interest is completely tax free.
Liquidity
Minimum lock in period is 2 years 6 months, while there is no such restriction on Fixed Deposits. Other debt instruments like PPF or EPF have lesser liquidity but offer tax free returns. Debt based MFs are much more liquid. So, it is better to put your money in other debt instruments than KVP
Minimum Investment
Rs. 1000/- is the minimum investment required to purchase a KVP. Here is where it scores. You might find it difficult to open a FD with small amounts as Rs. 1000, though regular SIPs in debt based mutual funds might be a much better idea. So, it is often useful for very small investors like farmers who do not have access to SIP mutual fund investments. The name, Kisan Vikas Patra, is hence justified.
Maximum Investment
There is no limit to the maximum investment. Though PPF has an upper limit of investment, FDs and EPFs and Debt based Mutual Funds do not have any such limits.
Availability
Currently, it is available only at Post Offices, but the government has plans to make it available at PSU banks. The idea was to encourage the rural population who may not have a bank account to get connected to their post offices for these KVPs
Summary
Considering all the above factors, KVPs are designed to enable the rural population into a habit of regular savings and hardly offer anything attractive for the urban population who already have a bank account and can go and open a Fixed Deposit at any stage. So, if you have a bank account, you can safely stay away from KVP 2014 as of now, and ignore all the hype surrounding it.
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Cheers
Manoj Arora
Freedom can buy you.... what money cannot !!
More on "From the Rat Race to Financial Freedom"
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