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Dividend v/s Fund Yield

Chandresh Rawka wants to know if short-term FMPs with dividend payout are a good option

Is it better to put money in Short term FMPs — dividend payout option offering better yield than liquid fund. Concerning that I fall in the highest tax slab? What are the taxation rules applicable to FMPs (Short Term and Long term). Do short term FMPs dividend payout option declare and pay dividend in tune of yield before the maturity date to save income tax.
—Chandresh Rawka

The dividend income of both Liquid fund and FMPs are subject to Dividend Distribution Tax (DDT). But DDT on liquid funds is more than FMPs. While FMPs attracts DDT of 14.16 percent, liquid funds attract DDT of 28.32 percent.

The treatment of long term and short term capital gains is similar for liquid funds and FMPs. The short term capital gain is taxed as per marginal rate applicable to the investor, while long term capital gain is taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower.

Considering both these aspects, it would be more tax efficient to park your money in a dividend payout FMP which suits your time frame rather going for a liquid fund.

For your benefit we did a study on the growth and dividend payout option of a short-term FMP. For the benefit of the investors opting for dividend payout option the funds pass on the entire benefit in form of dividend.

Suppose an investor like you who falls in the highest tax bracket, had invested Rs 1 lakh in a short-term FMP, the post-tax gain under both dividend and Growth options are illustrated in the following table.

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