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

NSSF & small savings schemes

[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
  1. National Small Savings Certificate (Late 50s)
  2. Indira Vikas Patra  (1986)
  3. 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)

NSSF & small savings schemes

  • 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
Kisan Vikas Patra launched, to encourage habit of small savings among citizens
Shyamala Gopinath Committee says KVP can be used for money laundering, therefore must be stopped. UPA-Government agrees.
In budget-2014, Finance ministry Arun Jaitley announced following measures to promote small savings in India:

  1. New National savings certificate with insurance cover
  2. Small saving scheme for girl child education and marriage
  3. PPF investment limit increased from 1 lakh to 1.5 lakh.
  4. Kisan Vikas Patra to be launched again.
Kisan Vikas Patra officially re-launched

KVP-2014: Salient Features for MCQs

Kisan Vikas Patra KVP Features Terms

  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

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