Kisan Vikas Patra Vs Bank FD: What You Should Know

The government recently relaunched erstwhile popular small savings scheme Kisan Vikas Patra to provide more investment options with the aim to raise the savings rate in the country. But financial planners say the Kisan Vikas Patra can be a good investment option for people who don’t have access to regular financial products and don’t fall under the tax bracket. But KVP is not an attractive option for those who have access to financial products like bank fixed deposits and mutual funds, they say.

“For people in lower economic strata who don’t have access to regular financial products and don’t fall under tax bracket, Kisan Vikas Patra can be a good option. But for those come under tax bracket and have access to other financial products it offers no real benefits,” said Suresh Sadagopan, the founder of financial planning firm Ladder7 Financial Advisories.

Under the new KVP scheme, the money invested in in KVPs will double in 100 months, or eight years and four months. This means an annual return of 8.67 per cent. It is available in the denomination of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000.

Mr Sadagopan said that bank fixed deposits can be a better bet than KVPs. Bank fixed deposits currently offer around 9 per cent on more than 1-year fixed deposits. And if an investor want invest for the long term, then some banks offer up to 10-year fixed deposits, he adds. These fixed deposits also offer rates around 9 per cent.

This has led to criticism about the attractiveness of KVP as an investment option. Expressing doubts over the success of the new Kisan Vikas Patra (KVP), former Finance Minister P Chidambaram said there are other investment schemes which offer better returns.

Mr Chambaram said though the ostensible purpose is to promote savings through KPV, “the argument is suspect because there are other fixed income instruments which offer better returns (than KVP)”.

Apart from lower interest rates, another disadvantage is that KVPs offer no income tax benefits. Like bank fixed deposits, interest earned from KVPs is added to the investors’ income and taxed at applicable rates. In other words, for investors in 10 per cent tax bracket, the effective interest from KVP will be around 7.8 per cent. For those in 20 per cent tax bracket, it is around 6.9 per cent while for 30 per cent slab it is 6 per cent.

Mr Sadagopan of Ladder7 Financial Advisories suggests that investors in higher tax brackets can also look at fixed maturity plans (FMP) offered by mutual funds. Indexation benefits offered by debt mutual funds after three years help significantly reduce the tax outgo of investors. FMPs are close-ended funds that predominantly invest in debt markets.

Investors can expect around 8.5 per cent post-tax return in three-year FMPs, says Mr Sadagopan. Currently, fixed maturity plans are available of duration of up to five years.