[Financial Inclusion] Kisan Vikas Patra (KVP): Features, Money Laundering, NSSF, Small Savings Instruments

1. Small saving instruments (SSI): Meaning & Benefits
   1. Small Savings instruments: Examples
   2. National Small savings fund (NSSF)
2. Kisan Vikas Patra (KVP): Timeline
   1. KVP-2014: Salient Features for MCQs
   2. KVP-1988 vs 2014: what’s the Difference?
   3. Kisan Vikas Patra & Black money / money laundering
   4. Kisan Vikas Patra: Other Criticism
3. Appendix
   1. A1: Shyamala Gopinath Committee
   2. A2: premature encashment
4. Mock Questions for CSAT

Small saving instruments (SSI): Meaning & Benefits

1. As the name suggests, Small saving instruments promote habit of savings among poor people, saved them from Ponzi scamsters.
2. SSIs are launched either through Statutory-Law OR gazette notification. Their Interest rates are “administered” by the government, hence considered risk free investments.
3. SSI investments (usually) enjoy tax exemption and tax deduction benefits under Income tax act of 1961. for example
   1. PPF deposit is deducted from taxable income, upto Rs.1.5 lakhs.
   2. Interest earned on Post office savings account: exempted from tax. (upto certain amount).
   3. No TDS (Tax deduction at source) on withdrawals for most schemes.

Examples of small savings instruments

Type	Examples	Governing Act
1.Post office deposits	Post office savings account, time deposits, recurring deposits, monthly income accounts.	Government Savings Banks Act, 1873
2. Savings Certificates	National Small Savings Certificate (Late 50s) Indira Vikas Patra  (1986) Kisan Vikas Patra (1988-2011, and 2014)	Government Savings Certificates Act 1959
3.Social security schemes	PPF: Public provident Fund (1968)	Public Provident Fund Act 1968
	Senior citizen savings scheme (2004)	Government Savings Banks Act, 1873

^Exact years not important but Chronological order is.

National Small savings fund (NSSF)

• 1999: NSSF was created in the Public accounts of India, on recommendations of R.V. Gupta Committee (Ex.Dy-Governor of RBI)
• The money collected from above small savings schemes, goes to National small savings fund (NSSF) in the Finance ministry.
• From NSSF, money is lent to Union and state governments for financing their fiscal deficit. Usually, 80% of the money is loaned to States and remaining 20% to Union.

Kisan Vikas Patra (KVP): Timeline

1988 April	Kisan Vikas Patra launched, to encourage habit of small savings among citizens
2011 Nov.	Shyamala Gopinath Committee says KVP can be used for money laundering, therefore must be stopped. UPA-Government agrees.
2014 July	In budget-2014, Finance ministry Arun Jaitley announced following measures to promote small savings in India: New National savings certificate with insurance cover Small saving scheme for girl child education and marriage PPF investment limit increased from 1 lakh to 1.5 lakh. Kisan Vikas Patra to be launched again.
2014 Nov.	Kisan Vikas Patra officially re-launched

KVP-2014: Salient Features for MCQs

1. Launched under Government Savings Certificates Act 1959.
2. Awareness Agency: National Savings institute, Department of Economic Affairs in Finance ministry.
3. At present, only sold via Post offices. Later, nationalized banks will be permitted to sell KVP as well.
4. KVP are available in the Denomination of Rs. 1000, 5000, 10,000 and 50,000.
5. There is no Upper Ceiling on Investment. You may invest as much as you want.
6. KVP will double your invested money in 100 Months (8 years and 4 months.)
7. If you want to pullout money before 100 months, you can do so after
   1. 30 months =2 years and 6 months OR
   2. Subsequent blocks of 6 months.
   3. For more, refer to appendix.
8. KVP certificate can be purchase in single individual name or in joint names. Need to submit ID proof and residence proof.
9. KVP can be bought using cash, cheque, demand draft BUT
   1. If Rs.50,000 or more invested, then PAN card copy is must.
   2. If Rs.10 lakh invested, client will have to give additional proof of income.
10. Adult can buy it on behalf of minors. But such certificate can’t be transferred to others as long as minor is alive.
11. Nomination facility available i.e. if I die, handover the money to xyz person.
12. KVP certificate can transferred to others via post office, for multiple times.
13. But to prevent money laundering, during every transfer, both certificate-giver and taker, will have to sign form in the post office along with photocopies of following, under KYC norms (Know your customer)
    1. ID proof
    2. Resident proof
    3. PAN card (if more than Rs.50,000 invested) as per KYC norms. .
14. If Certificate is destroyed/lost, client and get a duplicate copy BUT has to submit identity proofs. Therefore, again money laundering difficult.
15. Post-master can transfer the KVP certificate from an individual to President and governor, RBI, Banks, cooperative society, PSU, Government companies, Housing finance companies and even local Panchayat and municipalities.
16. Above feature is designed, to help the client use KVP as “security deposit” e.g.
    1. While taking loan from banks, cooperative societies or even housing finance companies.
    2. As Deposit for contesting elections.
    3. As “bond money” for certain jobs, such as the fabled ACIO, some PSU-jobs etc.
17. Tax liabilities
    1. Interest earned from Kisan Vikas Patra, is taxable.
    2. If you gift KVP-certificate to someone, then he’ll have to pay gift-tax to Government.

KVP-1988 vs 2014: what’s the Difference?

Old scheme (1988)	New scheme (2014)
Available in denominations of Rs. 100, 500, 1000, 5000 and 10,000	Rs. 1000, 5000, 10,000 and 50,000.
Money doubled in 8 years and 7 months. Some websites saying money doubled in 5.5 years but Hindu says 8.7 and what Hindu says is word of God for UPSC.	8 years and 4 months (100 months)
Annual compound interest rate 8.2% (Hindu) 8.4% (Indianexpresss)	NSC: 8.5% KVP: 8.7% (hence money doubles faster than  old KVP) PPF: 8.75% Post office term deposit: 8.4% Bank Fixed deposit (FD): ~9% and more
“Bearer” nature i.e. anyone could walk in the post office to buy and encash it. No stringent rules about PAN cards, ID proofs, KYC norms. Hence Shaymala Gopinath Committee feared money laundering.	Stringent norms. 50k=need PAN card, 10 lakh=need to disclose source of income.
Discontinued in 2011	Launched in 2014
Was quite popular because of liquidity and easy transfers. KVP used to fetch government ~30% of all money collected in small savings schemes.	Customers’ response yet to be seen. But Government hopes to collect ~35,000 crore rupees.

Kisan Vikas Patra & Black money / money laundering

• We learned that Kisan Vikas Patra were launched in late 80s but discontinued in early 2010s because of fears about money laundering.
• So, when Jaitley again launched KVP in 2014, Opposition parties again raised concerns:

Is Money laundering possible via Kisan Vikas Patra?

Yes it’s possible

Not possible

KVP can be bought using cash, cheque or demand draft. If KVP is bought using cheque or demand draft then money origin can be traced. But if person pays cash to buy the certificate, then hard to trace the source, particularly for small amounts. (Because PAN card becomes mandatory after Rs.50,000) Therefore, money laundering possible via “Money mules”. example: A “Goonda” type Sarpanch has looted 1 lakh rupees from MNREGA, gets 100 old villagers to deposit Rs.1,000 in each name, gives them 100 rupees commission. And if any villager tries to run away the KVP certificate, his family will be maimed or murdered.

Post office will keep record of ID proofs, address proofs for every client. PAN card mandatory for investment of Rs.50,000 and above If more than 10 lakh rupees invested, client will have to give another proof about source of his income.

Kisan Vikas Patra: Other Criticism

Anti-arguments	Pro-arguments
Hardly 8.7% return. Bank FD, Mutual funds and many system investment plans (SIP) offer 9% or higher return.	KVP’s main target audience is poor, rural and tribal families without access to formal banking and finance channels. If a person has other investment options- banks, mutual funds, then he can go. No one is holding gun over anyone’s hand to buy Kisan Vikas Patra.
Unlike NSC or PPF, you get no income tax benefit while investing in Kisan Vikas Patra. So, actual “return” will be less than 8.7% after paying taxes on the interest earned.	Majority of the Target audience doesn’t fall under income tax bracket. They’re just slightly “Above the poverty line”. If a person is in tax-bracket, he is should invest elsewhere.
No online facilities to check balance, add funds etc. as in Bank-FD and mutual funds. You’ve to manually visit post office every time to fill up the paper forms, collect the cash.	Majority of Target audience (rural, poor and tribal) don’t have net connectivity. And again, if you have such investment option, you can go.
Lock-in period of 30 months is too high. Small farmers and Poor families face many emergencies such as death, diseases, disability, droughts and disasters and need to pullout money quickly. But if they pullout money before 30 months- no interest rate paid.	Atleast KVP will prevent them from being duped by Saradha chit fund scam and other Ponzi scheme.

Appendix

A1: Shyamala Gopinath Committee

• 13th Finance commission (Vijay Kelkar) had recommended need for comprehensive reforms in small savings instruments.
• Therefore, Finance ministry setup a Committee under RBI Deputy Governor Shyamala Gopinath.
• Gopinath gave report in 2011. So, It’s very unlikely UPSC will ask its “salient recommendations” in Mains 2014 or 2015. But few points should be memorized as fodder for “resource mobilization” and “Money laundering” (Mains GS3 Paper)

Recommendations of Shyamala Gopinath Committee

1. Small savings certificates can generate black money. Because they’re out of the tax deduction at source (TDS) mechanism. So, Government should introduce TDS on SSIs under Direct tax code (DTC)
2. Small savings certificates can be used for money laundering i.e. converting black money to white money. Therefore,
   1. Computerize the Post office branches to monitor individual’s investment and ceilings.
   2. Stop Kisan Vikas Patra (KVP).
3. Increase the yearly investment limits in PPF.
4. Money collected from SSI goes to NSSF. At present this money is loaned to state:union in the ratio of 80:20. Change it to 50:50
5. If spare money left in NSSF i.e. when union/states not borrowing all the money, invest it to NHAI and infrastructure companies.

~120 words.

A2: premature encashment

• Not important for exam, but just for information.
• We learned that KVP doubles your money in 100 months. But if you wish to pullout money before that, you can do so after 2 years and 6 months.
• So how does this “premature enchashment” work in real life?

Observe the table for investment of Rs.1000

Time	Amount repaid
2 .5 years but <3 years	1201
3 years but <3.5 years	1246
3 .5 years but <4 years	1293
4 years but <4.5 years	1341
4 .5 years  but <5 years	1391
5 years but <5.5 years	1443
5.5 years but <6 years	1497
6 years but <6.5 years	1553
6.5 years  but <7 years	1611
7 years but <7.5 years	1671
7.5 years but <8 years	1733
8 years but before the maturity	1798
on 8 years & 4 months (=100 months)= Money doubled	2000

Mock Questions for CSAT

[columnize]
Q1. Which of the following is/are small savings instrument?

1. Recurring deposits made in Post Office.
2. Kisan Vikas Patra
3. Senior citizen savings scheme

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 2
4. All of them

Q2. Arrange the following in correct chronological order

1. Post office savings instruments
2. Nationalization of SBI
3. Kisan Vikas Patra
4. Indira Vikas Patra

Correct choice

1. 1234
2. 1243
3. 1324
4. 1423

Q3. Find incorrect statements about Kisan Vikas Patra 2014

1. Interest rate in KVP, is linked with CPI-rural inflation.
2. KVP doubles the money every 8 years and 4 months.
3. KVPs are available in the denominations ranging from 100 to 50,000.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. None of them

Q4. Find correct statements about Kisan Vikas Patra 2014

1. KVPs can be purchased on behalf of minors.
2. KVP can be purchased in individual or joint names.
3. Interest earned in Kisan Vikas Patra, automatically gets deposited to person’s Jan Dhan bank account.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. All of them

Q5. Which of the following safeguards are incorporated in Kisan Vikas Patra to prevent money laundering?

1. Upper investment limit is Rs.10 lakh for an individual.
2. Person has to provide copy of PAN card for investment of Rs.50,000 or more
3. Person has to disclose source of income, if investment more than Rs.10 lakh
4. No account can be opened without UID-Aadhar card.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. all of them

Q6. What are the salient features of Kisan Vikas Patra?

1. Investment upto Rs.1.5 lakh, get tax-deduction benefit under IT act.
2. KVPs can be pledged as security-deposit in public sector banks only.
3. KVP Funds can be withdrawn from ATMs using Kisan Credit card.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. None of them

Q7. Find incorrect statements about Small Savings instruments in India

1. Their interest rates are administered by the Bench Prime Lending rate (BPLR) of RBI.
2. Money collected from SSI, is transferred to National Investment Fund (NIF)
3. Money collected from SSI, forms a part of the Consolidated Fund of India.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. all of them

Q8. Find correct statements about National Small savings fund (NSSF)

1. Money from this fund, is utilized for covering the fiscal deficit of the Union and states.
2. Parliamentary approval is not necessary for utilizing funds from NSSF.
3. Both A and B
4. Neither A nor B

Q9. Which of the following pairs are correct?

1. Shyamala Gopinath: Discontinue Kisan Vikas Patra
2. SS Tarapore: Discontinue Capital Account convertibility
3. HR Khan: Utilize unclaimed deposits from PPF & Post offices, for Senior citizens welfare.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. all of them

Q10. (CSAT-Aptitude) at 8% annual compound interest rate, a Government savings certificate doubles the invested money in approximate 9 years. IF Finance minister wants to get the money doubled in only 4 years, by approximately what percentage he should increase this scheme’s interest rate from its present rate?

1. 45%
2. 125%
3. 225%
4. None of above

[/columnize]

UPSC Mains Examination

1. Write a note on the importance of Small savings schemes for resource mobilization and financial inclusion in India.
2. Discuss in brief, the concerns about the money-laundering in PMJDY and Kisan Vikas Patra, and recommend suggestions, if any.
3. List the recent measures taken by RBI and government of India, for financial inclusion in India.