FMPs score over FDs on the taxation front. While FDs are taxed at the tax rate applicable to the individual (which could be as high as 30%), FMPs which are held for more than 12 months enjoy the advantage of being taxed at 10% (without indexation). This makes the post tax yield of FMPs more attractive than FD.
Let me illustrate this with an example. Lets assume that you have invested 50,000 in an one year FD and 50,000 in a one year FMP. Lets further assume that the rate of interest on the FD and the yield on the FMP were both say, 9.5%. Now, the post tax yield of the FD would be 6.65% (Assuming 30% tax slab) while the post tax yield of the FMP would be 8.55% (Assuming 10% tax slab in the long term). This leaves you with an amount at maturity of 54,275 on the FMP while the FD would give you 53,325 post tax.
What are FMPs?
FMPs are schemes that invest in fixed income instruments like certificate of deposits, commercial papers, money market instruments, corporate bonds, debentures of reputed companies or in securities issued by government of India and fixed deposits selected by the fund manager. The basic objective of a FMP is to generate steady returns over a fixed period. Thus, investors are assured of returns if they stay invested in these products for the entire period. However, please note that since the secondary market for FMPs is fairly illiquid, you might not be able to make a premature withdrawal.
Categories: Mutual Fund