How is the tax treatment in FMP and Fixed deposits different?
- Prashant S Khubchandani
The major difference between the two is in the post tax returns. For instance, interest on bank FDs is fully taxable and gets taxed at the highest rate at which the assessee pays tax whereas the return from FMPs is either subject to the dividend distribution tax (for the dividend option) or the capital gains tax rate (for the growth option). The distribution tax rate is 14.16 per cent and the capital gains tax rate is 10 per cent (or 20 per cent with indexation). These taxation rates are lower than the income tax rate applicable on fixed deposits, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have an edge over bank fixed deposits, especially in the longer tenure when indexation benefit is allowed in FMPs.