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  • NSC vs KVP

    National Savings Certificates vs. Kisan Vikas Patra

    It is imperative to understand what these small savings schemes actually mean and how they operate before we actually pit them against each other to find out which one is better for which situation.

    What is a National Savings Certificate?

    National Savings Certificates, popularly abbreviated as NSCs are instruments issued by the Government of India under the small savings tier. They have inherent tax savings and investment features associated with them. They fall under the postal savings schemes of the Indian Postal Service. Typically, they have two variants, the NSC VIII issue and the NSC IX issue. While trusts and HUFs cannot invest in the VIII variant, every Indian citizen is allowed to invest under the NSC IX issue. These can be purchased from any postal office of India by an adult in his/her own name, on behalf of a minor, a trust and two adults only. The denominations of such certificates range in INR 100, INR 500, INR 1000, INR 5000 and INR 10000. NSC VIII issue has an interest rate of 8.50% per annum and NSC IX has an interest rate of 8.80% per annum as of April 2013. While investments of up to INR 150000 are qualified for income tax rebate, interest earned on NSC is still taxable as per the VIII issue only. The maturity periods of NSCs can be 5 years or 10 years.

    What is Kisan Vikas Patra?

    Kisan Vikas Patra, otherwise known as KVP, is a stable instrument of savings and investment authorised by the Reserve Bank of India and offered by the Indian Postal Service under the postal savings system. These deposits allow for a doubling of investment upon reaching a maturity period of 100 months. Denominations of INR 1000, INR 5000, INR 10000 and INR 50000 can allow an individual to start a minimum investment of INR 1000 and it has no cap on the maximum investment. The deposit scheme has a mandatory lock-in period of 30 months, after which all the investment and the returns can be withdrawn, albeit at a lesser interest rate. These specialised deposits have an interest rate of 8.7% per annum and the returns earned on the investment is taxable. These are one of the safest financial instruments to invest in.

    National Savings Certificates vs. Kisan Vikas Patra

    Now that we have had a refresher course in what each of the savings scheme actually does, let’s take a look at how each of these stack up against each other in comparison of features.

    National Savings Certificates

    Offering more returns over a sizably longer investment period, these are stable financial instruments that have added tax benefits.

    1. Rate of Interest – As mentioned above, these instruments offer rates of interest ranging from 8.5% to 8.8% per annum, calculated every six months, bringing the effective rate to somewhat around 9% per annum
    2. Financial Liquidity – Mandatory lock-in periods of either 5 years or 10 years make these investment schemes a choice for a long term goal, rather than something in the near future. Consequently, 10-year NSCs pay out better than 5-year ones
    3. Taxable returns – NSC VIII issue mandates that returns will be taxable, while the newer NSC IX that is currently available is tax free. The returns enjoy tax exemption as under Section 80C of the IT Act, making the effective returns through NSC even higher
    4. Premature withdrawal of funds – NSCs give a hard time when it comes to withdrawing investments before the maturity of 5 years or 10 years is done. Only under cases of the demise of the account holder, forfeiture of account by a gazetted officer or by order of law is this possible
    5. Loans – Having lock-in periods of 5 years and 10 years and being stable financial instruments, NSCs can easily be used as collaterals for availing loans for vehicles, housing and other secured loans
    6. Investment Security – Provided by the Government of India, NSCs offer rates that rarely change in a major way and are the safest possible investment one can make in India

    Kisan Vikas Patra

    A relatively newer savings scheme offered through the postal savings schemes, this came into being to encourage the habit of investment among rural folk and offers double the initial investment at the time of maturity.

    1. Rate of Interest – These financial instruments offer a singular rate of interest at 8.7% per annum. Coming close to the advertised rate offered by NSCs, KVP is a scheme that is better than most other savings schemes
    2. Financial Liquidity – With a mandatory lock-in period of only two and a half years, one can easily revert to KVP funds in case of any need in the immediate future. The returns obtained after 2.5 years of investment will be by far lesser than what they could have been at maturity
    3. Taxable returns – The returns on Kisan Vikas Patra investments are taxable. There is no workaround to that
    4. Premature withdrawal of funds – Closing a KVP investment by premature withdrawal of funds is allowed, although the advertised rate of return will only hold good if the investment is honoured for a period of 8 years and 4 months
    5. Loans – Kisan Vikas Patra investments are as stable financial instruments as NSCs and can easily be used as collaterals for availing loans for vehicles, housing and other secured loans. Better rates can be availed on loans, if investments are pledged with banks that offer schemes for the rural population
    6. Investment Security – Being in the same league as NSCs, KVP investments also have a similar high degree of security when it comes to the invested money

    Large Spends through Small Savings

    Investment as an option for growth of wealth is always a lucrative term for the financially wise. While both Kisan Vikas Patra investments and NSCs score pretty good points when investment is considered, thinking about the potential higher returns on NSCs makes them the obvious first choice since a no-frills tax exemption comes with the package, protecting the returns. On the other hand, KVP investments have a lesser lock-in period and can be handy when a sudden need of liquidity arises. It is advisable, thus, to set aside a lump sum in NSCs for an expense one considers taking a longer while to decide. After the investment in NSCs is done, one could consider investing in KVP, hoping for a maturity value and yet being ready for any kind of urgent financial needs that might crop up after 2 years.

    Important NSC Related Reads

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