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Old 12th January 2009, 10:35   #1
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Lightbulb NSC, KVP - Are they any good ??

A friend of mine was looking to invest in National Saving Certificates(NSC) and Kisan Vikas Patra(KVP) as looking at Stock market which is no good currently and Fixed Deposits rates aren't too much attractive for long term investments. Though i rejected his thought, as "investment" and "returns" in NSC and KVP attracts a good amount Tax. But still he finds them as best instrument to double your money in least period i.e. 8 Years and 7 months.

He would like to do a regular investment in NSC and KVP annually and re-invest the "return" amount accrued again to the same and continue the cycle till his retirement. This means he will be virtually investing till 8-9 years only, then there after re-investing the "return" accrued which will be continued as a re-investment till his retirement.

What do you say about his plans? Is it of any good or he will only end up in paying taxes and getting frustrated ? Do we have any other Govt or post office instruments which one can use for such investments?
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Old 12th January 2009, 10:50   #2
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Quote:
Originally Posted by ashthedivx View Post
A friend of mine was looking to invest in National Saving Certificates(NSC) and Kisan Vikas Patra(KVP) as looking at Stock market which is no good currently and Fixed Deposits rates aren't too much attractive for long term investments. Though i rejected his thought, as "investment" and "returns" in NSC and KVP attracts a good amount Tax. But still he finds them as best instrument to double your money in least period i.e. 8 Years and 7 months.
I had recently invested in a 5 year FD in a PSU bank at 9.75% ROI. The tax handling of NSC is the same as 5 yr FD (someone correct me if i am wrong), that is the amount invested is tax free but the amount gained is not. NSC gives 8.16% compounded annually, verses 9.75% for FD, which makes me think that FD is a better option (provided its > 5 yrs).
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Old 12th January 2009, 10:56   #3
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Sorry boss, FD ka income is taxed - while NSC/KVP etyadi are NOT.

What you need to make sure, though - is if he wants to explore debt/equity ELSS.
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Old 12th January 2009, 11:01   #4
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If the intention is to reinvest until retirement, why not look at PPF account. You can invest upto 70k per year into it.

Also if he invests say 25% of his "retirement savings" into equity through mutual funds, over a time frame of 15-20 years they will certainly yield returns better than PPF/NSC/KVP.

@phamilyman Interest from NSC/KVP are also taxed. It must be declared under "Income from other sources" in your form 16.

Though earnings(if any) from mutual funds are still tax free(if stayed invested for more than 1 year)

Regards,

Last edited by amohit : 12th January 2009 at 11:07.
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Old 12th January 2009, 11:02   #5
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I had recently invested in a 5 year FD in a PSU bank at 9.75% ROI. The tax handling of NSC is the same as 5 yr FD (someone correct me if i am wrong), that is the amount invested is tax free but the amount gained is not. NSC gives 8.16% compounded annually, verses 9.75% for FD, which makes me think that FD is a better option (provided its > 5 yrs).
You're right DCEite. The 5 year Tax saving FD's are equivalent to NSC's in the tax treatment. The only difference between the two is in the risk. Post office investments are 100% guaranteed by the Government of India. So, unless the GOI goes bust, you are bound to get the principal and interest on your investment. In a Bank FD, the insurance cover is only upto 1 lac, so theoretically speaking, if a bank were to go bust, you could lose all the money, except the insured 1 lac.

Best instrument as in highest returns and lowest risk is your company provident fund. It gives you a 8.5% tax free return, which is higher than the 11% pre tax in bank fd's and 8% of Post office. (Assuming you're in the highest tax slab). It is also extremely safe, higher than bank fd's but lower than post office. Where it loses out is on liquidity, since you really can access the funds only on retirement or if you are unemployed for over 3 months. A little known fact is that you can voluntarily increase your contribution to company PF to upto 100% of your basic salary. Another plus point of company PF is that you dont have to submit investment proofs to your company, since this amount gets deducted from your salary.

Last edited by Lalvaz : 12th January 2009 at 11:03.
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Old 12th January 2009, 11:05   #6
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Sorry boss, FD ka income is taxed - while NSC/KVP etyadi are NOT.

What you need to make sure, though - is if he wants to explore debt/equity ELSS.
Sorry phamilyman, Interest income from NSC/KVP is taxable. Not tax free.
So its the same as NSC's/KVP's if the FD is 5 years or more.
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Old 12th January 2009, 11:08   #7
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Quote:
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Sorry boss, FD ka income is taxed - while NSC/KVP etyadi are NOT.

What you need to make sure, though - is if he wants to explore debt/equity ELSS.
No sir, but KVP ka income is taxed. Moreover, even the amount invested in KVP is not deductable from taxable income. It all boils down to
FD @ 9.75% lock period of 5 years v.s NSC @ 8% lockin of 6 years .


This says that interest earned on even the NSC is not tax free:
source: Yahoo! India Tax Centre
Quote:
Interest earned from NSC was exempt under Section 80L in the erstwhile tax regime. However Section 80L was omitted in Finance Bill 2005. As a result interest earnings from investments in NSC are now fully taxable.

Last edited by DCEite : 12th January 2009 at 11:11.
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Old 12th January 2009, 11:31   #8
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So what is best option right now for 80C?

(Not- ELSS; Not-bank FD).
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Old 12th January 2009, 11:33   #9
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Originally Posted by amohit View Post
If the intention is to reinvest until retirement, why not look at PPF account. You can invest upto 70k per year into it.
He is already having a PPF account and regularly adding 70K to the same from the last 2 years.

Quote:
Originally Posted by Lalvaz View Post
Best instrument as in highest returns and lowest risk is your company provident fund.
The friend is self employed !


Quote:
Originally Posted by Lalvaz View Post
Sorry phamilyman, Interest income from NSC/KVP is taxable. Not tax free.
So its the same as NSC's/KVP's if the FD is 5 years or more.
Quote:
Originally Posted by DCEite View Post
No sir, but KVP ka income is taxed. Moreover, even the amount invested in KVP is not deductable from taxable income. It all boils down to
FD @ 9.75% lock period of 5 years v.s NSC @ 8% lockin of 6 years .

This says that interest earned on even the NSC is not tax free:
source: Yahoo! India Tax Centre
Investment and Interest income attracts taxes very well !
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Old 12th January 2009, 11:51   #10
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ashthedivx - Since your friend is self employed, and already investing 70k in PPF, then that leaves only 30k more under Section 80C, which might be covered by any insurance policies that he might have. So, that eliminates any tax saving instrument.

Now, over the longer term, equities have been known to outperform debt, so would suggest investing atleast 70% of his investible surplus in equity and 30% in debt. This is only valid in case he has atleast another 15-20 years to go for retirement. Also, over a period of time, say, every 3 years, he needs to reduce his investments into equity and increase it into debt, such that eventually as he comes closer to retirement, he is investing almost exclusively into debt and practically nothing into equity. Also, he might want to book some profits on his equity during any bullruns and divert those amounts to debt as well.

Please note that this is only general advise and might not be suitable for your friend, since I do not know his earnings, his liabilities and his monetary needs. Ideally he should go to a professional financial planner to help him plan his finances and retirement plan better. However, assuming that he has a long way to go, this is the general direction in which to invest.
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Old 12th January 2009, 13:27   #11
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Quote:
Originally Posted by Lalvaz View Post
ashthedivx - Since your friend is self employed, and already investing 70k in PPF, then that leaves only 30k more under Section 80C, which might be covered by any insurance policies that he might have. So, that eliminates any tax saving instrument.
Tax saving ain't a issue for him as far as i know, as he already having too many saving options which includes various ULIP, Mutual Funds, Insurance and PPF.


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Originally Posted by Lalvaz View Post
Now, over the longer term, equities have been known to outperform debt, so would suggest investing atleast 70% of his investible surplus in equity and 30% in debt. This is only valid in case he has atleast another 15-20 years to go for retirement. Also, over a period of time, say, every 3 years, he needs to reduce his investments into equity and increase it into debt, such that eventually as he comes closer to retirement, he is investing almost exclusively into debt and practically nothing into equity. Also, he might want to book some profits on his equity during any bullruns and divert those amounts to debt as well.
Looking at recent market crash-down he is actually too much negative for doing any type of investments in equity market. However, still he holds some ULIPs and Mutual Funds which he'll be operating in Equity mode to take advantage of any type of bullrun and be on safer side as well. He is too much eager to spend most of his saving in Debt investments. So was inquiring about secure debt. investments.

Quote:
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Please note that this is only general advise and might not be suitable for your friend, since I do not know his earnings, his liabilities and his monetary needs.
He is very much healthy (read married ) and young entrepreneur. Earnings are like after current household/personal expenses he might be able to shell out around a lakh rupee very easily for debt investments in a year. Liability aren't too much, as he lives in his parental house, apart from car EMI which itself is < 15K a month and will last long for another 2-3 years.
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Old 12th January 2009, 13:36   #12
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You may also look at BNB:
Should you invest in Bhavishya Nirman Bonds?
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Old 12th January 2009, 14:07   #13
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Sounds interesting !! Got to know via NABARD website that new bond issuing in closed currently. It looks like it is closed from July, 2008
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Old 12th January 2009, 17:11   #14
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ouchies. yes My very the bad. Good I posted here, else I was all set to buy NSCs

PPF or ELSS is what it should be then!
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Old 12th January 2009, 17:58   #15
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Any exposure to equity should be in SIP mode for 2009. There are too many bad news lurking around.
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