When investing in FMPs, should NRIs opt for dividend payout option or growth option, if indexation benefits are available?
FMPs are closed-end debt schemes that operate over a fixed period of time. Being a part of the debt universe, FMPs offer the benefit of indexation if you park your money for more than a year.
Tax treatment of your investments in FMPs will be same as resident Individuals. The only difference being the fund houses will deduct TDS from NRI investments at the time of redemption of units, regardless of tenure. You can claim a refund on this in the ITR.
The table below shows taxation of NRI investments in debt schemes.
If you fall in the highest tax bracket and don't need a regular income, you should choose the growth option. Debt fund gains after a year will be taxed at 10 per cent without indexation and 20 per cent with indexation, whichever is less.
If you choose the dividend option, the fund house will deduct Dividend Distribution Tax (DDT) at 28.325 per cent before paying out the dividends. If you are in the highest tax bracket and want to invest for less than a year, you should opt for dividend payout option because dividends will be taxed at 28.325 per cent while STCG will be added to your income and taxed at 30 per cent along with education cess and surcharge.