Bank Fixed Deposit Vs Fixed Maturity Plan.!

Which is better , Post Income Tax Returns..?

If any one looking for Short term investment plan (for one year or so) with decent return then first option that comes in their mind is Bank Fixed Deposit (FD). Which is good option as returns are guaranteed however Bank FD are not income tax efficient and after tax returns are very low, so what is next option available which is more beneficial ?

Fixed maturity plan (FMP) by mutual funds are the better scheme for post tax return basis as compare to Bank FD.

What is FMP.. ?

Fixed Maturity Plans (FMPs) falls under the debt category of MF (mutual fund) with exposure to fixed income securities with the Primary objective is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. They are also known as Fixed Tenure Funds (FTF) and Fixed Horizon Funds (FHF).

Portfolio Compositions..~!

The portfolio of FMPs basically consists of fixed income securities viz. Certificate of Deposits (CDs), Commercial Papers (CPs), corporate debt papers, PTCs (Pass through certificate) and other liquid & money market instruments.

These securities come with lesser risk and delivers fixed returns. Maturity of instruments corresponds with the maturity of FMPs.

Risk and Return..!

Unlike Bank FD, Return in FMP is not guaranteed. However from past experience we can says that FMP generate return equals to FDR or around FDR's return.But FMP are more tax efficient.

Maturity..!

FMPs come with different maturities ranging from 30 Days, 90 Days, 6 months, 1 year, 3 years, 5 years and are locked in till the maturities period.

But most tax efficient FMP scheme have a maturity period of little more days than a year (like 370 days , 375days ).

Income Tax applicable on FMPs.!

•   In FMPs, long-term Capital Gains( period more than one year – 365 Days) are taxed at 10.30 % without indexation benefit ,and 20.60 % with indexation, while short-term (period less than 1 year -) are taxed as per income slab (10.3% or 20.6% or 30.9%).

•  

•   If you select Dividend option in FMP,  Dividend is distributed after deduction of distribution tax and not taxable in your hand on receipt basis.

                                                                                                                                                 Income Tax applicable on Bank FDs and FMPs

    

     Interest from bank FDs are taxed as per income slab ((10.3% or 20.6% or 30.9%) for both short an long – term Duration.

When to Invest in FMPs..?

It is ideal time to invest in FMP now, especially FMPs with maturity ranging from 370 days to - 400 days.

An Example :Rs. 1 lakh invested in FMP for 374 days on 29 March, 2013. So that maturity date will be 7 th April, 2015. By doing this you can get capital gain indexation benefit for 2 years.

Post Tax Return of MF FMP Bank  FD – Comparison...!

Continue with above example, further here we assume that Bank FD and FMP both generates equal return for given period that is 9 % for 374 days.

Post tax return on 9 % Bank FD for different Tax slabs
Amount Invested Rs.		1,00,000		1,00,000		1,00,000
	Interest Rs.		9000		9000		9000
	Maturity Amount Rs.		1,09,000		1,09,000		1,09,000
	Tax slab (%)		10.30		20.60		30.90
	Tax on Interest part Rs.		927		1854		2781
	Net amount after Tax Rs.		1,08,073		1,07,146		1,06,219
	Post Tax Return (%)		8.07		7.15		6.22
Post Income Tax Return on FMP for Different tax slabs
Amount Invested Rs.		1,00,000		1,00,000		1,00,000
	Growth (assumed) Rs.		9000		9000		9000
	Maturity Amount Rs.		1,09,000		1,09,000		1,09,000
	Cost Inflation index (Fy 12 -13)		852		852		852
	Cost Inflation index (Fy 14 -15) assumed		960		960		960
	Indexed cost *		1,12,676		1,12,676		1,12,676
	Capital Loss		3676		3676		3676
	Tax due		Nil		Nil		Nil
	Post Tax return		9 %		9 %		9 %

* Indexed cost =1,00,000 * 960 /852 = 1,12,676

Assume CII For FY 2014-15 as 960

From the above chart it is clear that post tax return in Bank FD for different slabs of income tax rates is 8.07% ,7.15 % and 6.22% ,where as in FMP no tax is payable after indexation,so, tax point of view FMP is better .

However many financial advisors recommend this product only to persons who falls under 30.9 % tax slab due to risk involved as given above.

Growth / Dividend ? Which option of FMPs to be selected

It is desirable to choose growth option for suggested period of time above as there will be Nil tax applicable in growth plan as shown above. Dividend option should not be selected as the dividend is to be distributed after deduction of distribution tax.

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