What is the tax liability on premature closure of KVP?

What is the tax liability on premature closure of Kisan Vikas Patra after a holding period of two years and six months from the date of opening the account? - Anonymous

The premature closure of Kisan Vikas Patra (KVP) does not have a specific impact on taxation. The interest earned on KVP is added to the investor's taxable income on a yearly basis, similar to fixed deposits, and taxed as per the applicable slab rate.

Kisan Vikas Patra (KVP) is a savings scheme offered by the Indian Government that allows individuals to invest their savings and earn a fixed rate of interest over a period of 115 months (scheme duration). The current interest rate for KVP is 7.5 per cent per annum, compounded annually.

Kisan Vikas Patra premature withdrawal
Premature closure of Kisan Vikas Patra is possible after a lock-in period of two years and six months.

To apply for premature withdrawal of KVP, individuals need to fill out a form and submit it at the post office or bank where the investment was made. Premature closure of the account is subject to certain terms and conditions established by the government, such as the account being closed on the death of the account holder, forfeiture by a pledgee who is a Gazetted officer, or a court order.

Kisan Vikas Patra taxation
It is important to note that the interest earned on KVP is taxable as per the income tax laws in India. The interest is added to the investor's income and taxed at the applicable income tax rate. Therefore, investors may need to pay a considerable amount of tax if they fall into the higher income tax slab.

For example, investing Rs 1 lakh in a KVP scheme with an annual return of 7.5 per cent earns an interest of Rs 7,500 in the first year. The interest is added to income and taxed as per applicable slab. With compounding, the balance grows to Rs 1,15,562 at the end of the second year, and the cycle continues until maturity or premature closure.

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