Smart Investing(Fixed maturity Plans or Fixed Deposits)

Fixed Maturity Plans Vs FD

Fixed Maturity Plan (FMP):

These funds are closed ended fund with a pre defined maturity such as monthly, quarterly, half yearly or annually & have most of the investment in debt instruments.

FMP invest in fixed income securities like Govt. Securities, Corporate Bonds, CP (Commercials Papers), CD (Certificate of Deposits) and other debt instruments.

Features of FMP:

• Competitive tax efficient return with min risk
• Available for different time period
• Good for those investors who look for steady and predefined maturity & tentative return.
• FMP usually have expense ratio between 0.25% to 1%
• To avoid early redemption FMP have higher exit load anywhere between 1% and 3%

Tax Implications:

• There are different Taxation aspects depending upon Investment Scheme like growth or Dividend options.

Dividend Distribution Tax

Ø For Individual Investor: 14.025%

Ø For Corporate Investors: 22.44%

• Short Term Capital Gain: If you invest in the Growth option of the FMP for less than 1 year, the gain is added to the Investor’s Income and Taxes at the Investor’s Income Tax Slab rate.
• Long Term Capital Gain: If you invest in Growth Option of FMP for over a year, you pay either 10% capital gains Tax without indexation or 20% with Indexation.

Indexations Benefit:

Indexation: Indexation is a technique to adjust income by using price Index.

As the year passes price also rises so actual price should not be used while calculating profit or gain rather it should be indexed as per the Inflation in the country so people can know real gain.

Indexed Purchase Price=

Purchase price*(cost of Inflation Index for Current year/Cost of Inflation Index for purchase year)

Now taking the advantage of Indexation we can save our Tax on LTCG.

Ex:

Suppose you have invested in FMP for 370 days @ 9.5% return

You have invested on 29^th March 2011 and this FMP will mature on 2^nd April 2012

The above Investment comes under financial year 2010-11, FY-11-12 & FY12-13.

It passes through two financial years so investor gets double Indexation benefit.

DTC(Direct Tax Code) Situation:

Considering to DTC Implication holding period is important in Current Tax scenario.

Holding period will start from end of financial year in which the asset is purchased irrespective the asset is purchased on 1^st Oct 2010 or 1^st March 2011, holding period will start from 1^st April 2011 and to consider Investment as a Long term it should sold after 31^st March 2012.

Let us an example: If the Investment is made on 1^st Sep 2011 and mature on 4^th Sep 2012.

Financial year Starts from 1^st April 2011 and end to 31^st March 2012 another Financial year 1^st April 2012 to 31^st March 2013.

In above situation investment does not pass through any financial year so no Indexation benefit on above investment, it will not come under LTCG irrespective of 12 months above holding period.

This is the drawback in FMP if the DTC (Direct Tax Code) comes.

Comparison Sheet of FD Vs FMP:

Let us take an Example of FMP with following features:

A) For 498 Days FMP with 9.56% return.

Invested on 25^th March 2009 and maturity on 5^th Aug 2010.

Considering Investor is in highest Tax Slab.

Working:

Indexation benefit:

FY2008-2009, FY-2009-2010, FY-2010-11

CII For

FY CII

FY-2008-09 582

FY-2009-10 632

FY-2010-11 711

A) FMP, 498 Days Invested on 25 March 2009 and Maturity on 5 Aug 2010.

498Day FMP with 9.56% Return

(Considering Investor is in highest Tax Slab.)

	Bank FD	FMP		FMP Divd Option
	Bank FD	With Indexation	Without Indexation
Amount of Investment(Rs.)	10000.00	10000.00	10000.00	10000.00
Indicative Yield	9.56%	9.56%	9.56%	9.56%
holding Days	498	498	498	498
Maturity Amount	11304.35	11304.35	11304.35	10000.00
Divd(Rs)				1304.35
Gain	1304.35	1304.35	1304.35	1384.85
Indexed Cost	NA	12216.49	NA	NIL
Indexed LTCG/Loss Adjusted for Indexation	NA	-912.14		NA
Tax Rate	33.66%	33.66%	11.22%	14.03%
Tax	439.04	0.00	146.35	194.29
Post Tax	865.31	1304.35	1158.00	1190.56
Post Tax Ann Return	8.44%	12.73%	11.30%	11.62%

The above table depicts that FMP (Growth Option) with more than 1 year is better than FD having higher post Tax return.

B) FMP OF 90 Days Invested on 25 March 2009 and Maturity on 23 Jun 2009

90Days FMP, Yield 9.56%

	Bank FD	FMP Growth Option	FMP Divd Option
Amount of Investment(Rs.)	10000.00	10000.00	10000.00
Indicative Yield	9.56%	9.56%	9.56%
holding Days	90	90	90
Maturity Amount	10235.73	10235.73	10235.73
Divd(Rs)			235.73
Gain	235.73	235.73	235.73
Tax Rate	33.66%	33.66%	14.03%
Tax	79.35	79.35	29.00
Post Tax	156.38	156.38	206.73
Post Tax Ann Return	6.34%	6.34%	8.38%

The above table depicts that FMP (Dividend option) for less than 1 year is better than FD having higher post Tax return.

Conclusion:

• If investor falls in highest Tax Slab then he can invest in FMP Growth or Dividend option to earn higher post Tax return compared to FD.
• In FD return is fixed but in FMP maturity period is fixed so in investors must take consideration of his risk appetite.
• For FMP more than 1 year Growth option is good but for FMP less than 1 year Dividend option is good to get post tax return.

Happy Investing!