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Pick FMPs Over FDs

FMPs have an edge over bank fixed deposits because they are more tax efficient, especially for a longer tenure…

I want to invest in a fixed maturity plan. What is the tax liability on my investment? Are these better investments than a bank fixed deposit? - Segu Subramanyam

Fixed maturity plans or FMPs score over bank deposits by being tax efficient, which is reflected in their post tax returns. The 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.

Fixed Maturity Plans  Bank FD  Without Indexation  With Indexation
Investment Amount (Rs) 1,00,000.00 1,00,000.00 1,00,000.00
Assumed Annual Net Yield to investor (%) 7.5 7.5 7.5
Tenor (Months) 13 13 13
Amount on Maturity (Rs) 1,08,125.00 1,08,125.00 1,08,125.00
Interest/Long Term Capital Gain 8,125.00 8,125.00 8,125.00
Indexed Cost of Acquisition NA NA 1,10,250.00
Indexed Gain/Loss NA 8,125.00 -2,125.00
Tax Rate^ 33.66% 11.22% 22.44%
Tax on Interest on FD/ Capital Gain on MF 2,734.88 911.63 -
Post Tax Income 5,390.13 7,213.38 8,125.00
Post Tax Rate (Simple Annualised) 4.98% 6.66% 7.50%
^ Assumed to be in the highest tax bracket

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