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Roll No.: 30

Smt. P.D. Hinduja Trusts


315, New Charni Road, Mumbai 400 004 Tel.: 022- 40989000 Fax: 2385 93 97. Email:

NAAC Re-Accredited A

Prin. Dr. Minu Madlani (M. Com., Ph. D.)


This is to certify that MR. ADITYA KATOCH of M. Com (Banking &

Finance) Semester 3rd [2016-2017] has successfully completed the
DEPOSITS under the guidance of Dr. KULDEEP SHARMA

________________ _____________
Project Guide Co-coordinator



Internal Examiner External Examiner

________________ _______________

Principal College Seal


I, Mr. ADITYA KATOCH student of M. Com - Banking and finance, 3rd

semester (2016-2017), hereby declare that I have completed the project

The information submitted is true and original copy to the best of our





1. Introduction 06

1.1 Introduction
1.2 Objectives
1.3 Scope
1.4 Research methodology
1.5 limitations

2. Fixed Deposits 08

2.1 Introduction
2.3 Benefits.
2.4 Disadvantages.
2.5 Taxability
2.6 How banks FD rates vary with the central bank

3. Fixed Maturity Plans 14

3.1 Introduction
3.2 What are Indexation Benefit?
3.3 Benefits of FMP
3.4 Where do FMPs invest?
3.5 Who can Invest and What be the Risk?
3.6 How do FMPs work?
3.7 Are FMPs Liquid?

3.8 FMP Returns

3.9 What are the Tax Advantages?
3.10 Summing Up
4. Fixed Maturity Plans Vs Fixed Deposits 24

5. Fixed Maturity Plans are better than Fixed 27

6. Conclusion 30
7. Bibliography 32


1.1 Introduction
Fixed deposits gives you higher returns under which your amount is which

is held by bank cannot be withdrawn under certain specified period of time.

Fixed Maturity Plans (FMPs) are popular among investors at the end of the

financial year as they get the benefit of triple indexation, thereby reducing

their tax liability.

FMPs are closed-ended debt funds with a maturity period which could range

from one month to five years. Because debt funds enjoy long term capital

gains tax after three years, typically three-year FMPs are now popular.

FMPs are predominantly debt-oriented, and their objective is to provide

steady returns over a fixed-maturity period, thereby protecting investors

from market fluctuations.

1.2 Objectives
To study about Fixed Deposits.
To study about Fixed Maturity Plans.
To study and understand as to how and why are Fixed Maturity Plans better

than the Banks Fixed Deposits

1.3 Scope
To acquire knowledge about the Fixed Deposits
To acquire knowledge about Fixed Maturity Plans
To know how FMPs are different and better from the bank FDs

1.4 Research Methodology

The data and information in this project are based on collected information

from secondary sources such as books, journals, articles & the internet.

1.5 Limitations
The limitations of my projects were the time constraint I had only a period

of one week to find out the details about publicity and public relations in

international marketing, otherwise apart from time I found no difficulty

doing this project. Mostly everything was available on the internet and the


2.1 Introduction
A fixed deposit (FD) is a financial instrument provided by banks which

provides investors with a higher rate of interest than a regular savings

account, until the given maturity date. It may or may not require the creation

of a separate account. It is known as a term deposit or time

deposit in Canada, Australia, New Zealand, and the US, and as a bond in

the United Kingdom and India. They are considered to be very safe

investments. Term deposits in India and Pakistan is used to denote a larger

class of investments with varying levels of liquidity. The defining criteria

for a fixed deposit is that the money cannot be withdrawn for the FD as

compared to a recurring deposit or a demand deposit before maturity. Some

banks may offer additional services to FD holders such as loans against FD

certificates at competitive interest rates. It's important to note that banks

may offer lesser interest rates under uncertain economic conditions. The

interest rate varies between 4 and 11 percent.

The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be

as high as 10 years.

These investments are safer than Post Office Schemes as they are covered

by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

However, DICGC guarantees amount up to 1,00,000 (about US$1600) per

depositor per bank. They also offer income tax and wealth tax benefits.

Fixed deposits are a high-interest -yielding Term deposit and offered by

banks in India. The most popular form of Term deposits are Fixed Deposits,

while other forms of term Deposits are Recurring Deposit and Flexi Fixed

Deposits (the latter is actually a combination of Demand deposit and Fixed


To compensate for the low liquidity, FDs offer higher rates of interest than

saving accounts. The longest permissible term for FDs is 10 years.

Generally, the longer the term of deposit, higher is the rate of interest but a

bank may offer lower rate of interest for a longer period if it expects interest

rates, at which the Central Bank of a nation lends to banks ("repo rates"),

will dip in the future.

Usually in India the interest on FDs is paid every three months from the date

of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest

instalment would be paid

on 15 May). The interest is credited to the customers' Savings bank account

or sent to them by cheque. The customer may choose to have the interest

reinvested in the FD account. In this case, the deposit is called

the Cumulative FD or compound interest FD. For such deposits, the interest

is paid with the invested amount on maturity of the deposit at the end of the


Although banks can refuse to repay FDs before the expiry of the deposit,

they generally don't. This is known as a premature withdrawal. In such

cases, interest is paid at the rate applicable at the time of withdrawal. For

example, a deposit is made for 5 years at 8%, but is withdrawn after 2 years.

If the rate applicable on the date of deposit for 2 years is 5 per cent, the

interest will be paid at 5 per cent. Banks can charge a penalty for premature

withdrawal. S

Banks issue a separate receipt for every FD because each deposit is treated

as a distinct contract. This receipt is known as the Fixed Deposit Receipt

(FDR), that has to be surrendered to the bank at the time of renewal or


Many banks offer the facility of automatic renewal of FDs where the

customers do give new instructions for the matured deposit. On the date of

maturity, such deposits are renewed for a similar term as that of the original

deposit at the rate prevailing on the date of renewal.

2.2 Characteristics
The main purpose of fixed deposit is to enable the person to earn a higher

rate of interest on their surplus funds.

The amount can be deposited only once. For further such deposits, separate

accounts need to be opened.

A high rate of interest is paid on fixed deposits. The rate of interest may

vary as per amount, period and from bank to bank.

Withdrawals are not allowed. However, in case of emergency, banks allow

to close the fixed account prior to maturity date. In such cases, the bank

deducts 1% from the interest payable as on that date.

The depositor is given a fixed deposit receipt; which depositor has to

produce at the time of maturity. The deposit can be renewed for a further


2.3 Benefits
Fixed deposit encourages saving habit among people for a longer time.

Fixed account enables the depositors to earn a higher rate of interest.
The depositor can get loan facility from the bank.
On maturity the amount can be used to make purchase of assets.
The bank can get the funds for a longer period of time.
The bank can lend such funds for short term loans to businessmen.
Fixed deposit indirectly boost economic development of the country.
The bank can also invest such funds in profitable areas.

2.4 Disadvantages

Biggest disadvantage of investing money in fixed deposit is that its returns

are low and if the inflation is very high fixed deposit investors are the worst

hit as the return from fixed deposit may not be sufficient to cover the high

expenses due to inflation.

If one invests all of his or her money in fixed deposits then he or she may

not enjoy the benefits of diversification which one gets if one invests the

money in stock markets, real estate, gold and other alternative investments.

As far as taxation is concerned fixed deposits are taxed at normal rates of

taxation and hence one cannot take the tax benefit from this investment.

2.5 Taxability

Tax is deducted by the banks on FDs if interest paid to a customer at any

bank exceeds Rs. 10,000 in a financial year.

This is applicable to both interest payable or reinvested per customer. This is

called Tax deducted at Source and is presently fixed at 10% of the interest.

With CBS banks can tally FD holding of a customer across various branches

and TDS is applied if interest exceeds Rs 10,000. Banks issue Form 16 A

every quarter to the customer, as a receipt for Tax Deducted at Source.[9]

However, tax on interest from fixed deposits is not 10%; it is applicable at

the rate of tax slab of the deposit holder. If any tax on Fixed Deposit interest

is due after TDS, the holder is expected to declare it in Income Tax returns

and pay it by himself.

If the total income for a year does not fall within the overall taxable limits,

customers can submit a Form 15 G (below 60 years of age) or Form 15 H

(above 60 years of age) to the bank when starting the FD and at the start of

every financial year to avoid TDS.

2.6 How bank FD rates of interest vary with Central Bank policy

In certain macroeconomic conditions (particularly during periods of high

inflation) a Central Bank adopts a tight monetary policy, that is, it hikes the

interest rates at which it lends to banks ("repo rates"). Under such

conditions, banks also hike both their lending (i.e. loan) as well as deposit

(FD) rates. Under such conditions of high FD rates, FDs become an

attractive investment avenue as they offer good returns and are almost

completely secure with no risk.


3.1 Introduction

FMPs, as they are popularly known, are the equivalent of a fixed deposit in

a bank, with a caveat. The maturity amount of a fixed deposit in a bank is

'guaranteed', but only 'indicated' in the FMP of a mutual fund. The regulator

does not allow fund companies to guarantee returns, and hence the 'indicated

returns' in FMPs.

Typically, the fund house fixes a 'target amount' for a scheme, which it ties

up informally with borrowers before the scheme opens. Since the fund

house knows the interest rate that it will earn on its investments, it can

provide 'indicative returns' to investors.

FMPs are debt schemes, where the corpus is invested in fixed-income

securities. The tenure can be of different maturities, from one month to three

years. They are closed-ended in nature, which means that once the NFO

(new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to

corporates and well-heeled, high net-worth individuals. Nevertheless, the

minimum investment is usually Rs 5,000 and so a retail investor can

comfortably invest too.

FMPs usually invest in certificate of deposits (CDs), commercial papers

(CPs), money market instruments, corporate bonds and sometimes even in

bank fixed deposits.

Depending on the tenure of the FMP, the fund manager invests in a

combination of the above-mentioned instruments of similar maturity. Say if

the FMP is for a year, then the fund manager invests in paper maturing in

one year.

The prevalent yield minus the expense ratio, which varies from 0.25 to 1 per

cent, will be the indicative return which can be expected from the FMP.

The expense ratio is mentioned in the offer document. The yield can be

indicated fairly accurately because these schemes are open only for a short


The fund received is for a pre-specified tenure and the exit load from this

plan is high (usually 1 per cent to 3 per cent, depending on the time of

redemption). So, the fund manager has the liberty to deploy most of the

funds mobilised under the scheme.

The actual return can vary slightly, if at all, from the indicated return.

Against that, a bank fixed deposit exactly prints the amount which is due to

you on maturity on the FD receipt. However, FMPs do earn better returns

than fixed deposits of similar tenure.

The magic is in the tax treatment of a mutual fund FMP. FMPs are classified

under the debt scheme category and enjoy certain tax benefits, such as:

a. Dividend in the hands of the investor is tax-free. But the mutual fund has

to deduct a dividend distribution tax of 14.025 per cent in the case of

individuals and Hindu Undivided Families (HUFs), and 22.44 per cent in

the case of corporates.

b. Long-term capital gains (investment of more than a year) enjoy

indexation benefit.

c. Short-term capital gains are added to the income of the investor and taxed

as per his/her slab, whereas the interest on a bank deposit (except where

special 80C approved) is added to the income of the investor and taxed as

per his/her slab.

Take an example of a 90-day FD yielding 8 per cent, compared with an FMP

yielding 8 per cent for an individual investor in the highest tax bracket.


dividend growth

option option
Net yield 8% 8% 8%
Tax 33.66% - 33.66%

DDT - 14.025%
Net yield 5.3% 6.8% 5.3%

Actually, the dividend distribution tax is deducted on the gross yield. So the

return from the dividend option can be 10-20 bps higher.

But for the sake of simplicity, it is calculated here on net yield. If the tenure

of the FMP is more than a year, the growth option gives a higher yield

because of the indexation benefit.

3.2 What is indexation benefit?

The finance minister has been generous enough to recognise that inflation

erodes the real value of any investment. So every year, he comes out with an

inflation index based on the prevailing rate of inflation. The cost of

investment is indexed by multiplying the index of the year of maturity and

divided by the inflation index prevailing on the year of investment. If you

have arrived at an indexed cost, then the long-term capital gain is taxed at

22.44 per cent and if you do not opt for the indexed cost, then the tax is

11.22 per cent.

How does this pan out?

Take an example of a 30-month FMP which, if launched now, will mature in

June 2009. It will pass through three financial years - launch in 2006-2007

and maturing in 2008-2009. Thus, it can have a benefit of triple-cost

indexation for the purpose of calculating post-tax yield. Look at the

workings: Note: Cost Inflation Index for FY06-07 is 519. The assumption is

that the CII for FY07-08 is 567 and for FY08-09 is 592. Clearly, the post-

tax return is superior for an FMP.

Deposit 30 Month FMP

With Indexati
Indexation on

Amount of
Investment (Rs.) 10000 10000 10000

Post Expenses
Yield (p.a)* 8.30% 8.30% 8.30%

Tenor (in
months) 30 30 30

Maturity Amount 12,075 12,075 12,075

Gain 2075 2075 2075

Indexed Cost NA 11,406 NIL

Indexed Gain NA NA

Tax Rate 33.66% 22.44% 11.22%

Tax 698 150

Post Tax Gain 1377 1925 1843

Approx. Post
Tax Annualised
Return 5.5% 7.7% 7.3%

3.3 Benefits of FMPs

Capital Protection and No Rate Volatility: Since they invest in debt

instruments, FMPs provide low risk of capital loss as compared to equity

funds. As the securities are held till maturity, FMPs are not affected by

interest rate volatility. Taxation Benefit: FMPs offer better post-tax returns

than FDs as well as liquid and ultra-short-term debt funds because they offer

indexation benefits. Indexation helps to lower capital gains and thus lower

the tax.
Triple indexation allows an investor to take advantage of indexing his

investment to inflation for four years while remaining invested for a period

of slightly more than three years. Lower Expense Ratio: Since these

instruments are held till maturity, there is a cost saving with respect to

buying and selling of instruments, thereby resulting in a lower expense ratio

for investors.

3.4 Where do FMPs Invest?

FMPs usually invest in certificates of deposits (CDs), commercial papers

(CPs), money market instruments, highly rated securities (like 'AAA' rated

corporate bonds) over a defined investment tenure. Sometimes they also

invest in bank fixed deposits. They do not invest in equities.

3.5 Who can Invest & What be the Risks?

Investors across risk profiles may look at investing in FMPs though it comes

with a caveat that they are not completely risk free. FMPs face credit risk,

i.e. the chance of loss to an investor arising from the loan default of a

borrower who fails to make the promised interest or principal payments (on

a security in the portfolio) when due. The risk of default is lower if the FMP

invests in high rated debt instruments. Hence it is important for investors to

monitor FMP portfolio disclosures. Investors must note that FMPs are

structured to offer a combination of capital appreciation and preservation,

however, without a guarantee. Hence, FMPs may not necessarily fit into the

definition of conventional capital protection debt instruments. Investors may

also note that bank FDs up to Rs 1 lakh are guaranteed by the government

through the Deposit Insurance and Credit Guarantee Corporation of India

unlike FMPs. Further, FDs are relatively more liquid as premature

redemption is allowed, albeit at a fee.

3.6 How do FMPs Work?

An FMP portfolio consists of various fixed income instruments with

matching maturities. Based on the tenure of the FMP, a fund invests in

instruments in such a way, that all of them mature around the same time.

During the tenure of the plan, all the units of the plan are held until they

mature on a specified date. Thus, investors get an indicative rate of return of

the plan.
The basic objective of FMPs is to generate steady returns over a fixed

tenure, thus shielding investors from interest rate fluctuations. FMPs achieve

this by investing in a portfolio of debt securities [predominantly certificate

of deposits (CDs) and commercial papers (CPs)] whose maturity or tenure

matches that of the scheme. These securities are redeemed at the end of the

FMP term. For example, if the FMP is for 12 months, the fund manager will

invest in instruments with a maturity of 12 months only. Since FMPs are

closed ended and investors cannot redeem units with the mutual fund during

the FMP tenure, the fund manager need not sell any part of the portfolio

during this tenure thus locking the yield of the portfolio. This also mitigates

the risk of loss on premature sale of securities and lowers the interest rate

risk. FMPs, however, are not allowed to provide 'indicative yields' to

investors like in the case of FDs, where interest rates are pre-defined.

However, in a rising interest rate environment (as is currently prevailing),

FMPs will inherently capture this trend.

3.7 Are FMPs Liquid?

Since FMPs are close end funds, they can only be traded on the stock

exchange, where they are listed. However, trading in these units is negligible

which makes FMPs illiquid. Compared to this, open end debt funds which

can be bought or sold on a daily basis.

3.8 FMP Returns

Initially, the strict bearing of SEBI (Securities and Exchange Board of India)

to not disclose the asset portfolio in close-ended mutual funds, made it

difficult for potential investors to get any clarity on the returns that they

would get when investing in FMPs. But in 2011, they relaxed this rule so

that investors can now be well aware of the asset allocation in such close-

ended schemes.

If you are investing in an FMP, knowing and understanding the asset

allocation should be your priority, as you can predict the maturity on returns

by analysing the current yield of the assets.

Current Yield Current price of a fixed income security.

FMPs generally invest in the following securities


Non-convertible debentures

Commercial Papers

Certificates of deposits

3.9 What are the Tax Advantages?

FMPs are a more attractive alternative where tax advantage is concerned

vis-vis FDs. The interest received from FDs is subject to tax at the investor's

marginal rate of tax, which can range from 10 to 30%. However, returns

from FMPs are subject to tax as follows:

a. If investors opt for the 'dividend' option (returns are received as

dividends), they are subject to Dividend Distribution Tax (DDT) @

12.5% (for retail investors) plus applicable surcharge and cess, which is

paid by the fund and is tax-free in the hands of the investor.

b. If investors opt for the 'growth' option, they are subject to Capital Gains

Tax. For example, in case of a growth option with a maturity of more

than 1 year, one can use the benefit of long term capital gains where the

tax rate is 10% (without indexation benefits) or 20% (with indexation


c. It should, however, be noted that the DDT on corporate plans of money

market, liquid and debt funds (including FMPs) has been increased to

30% from 25% and thus will now be taxed at par with bank fixed

deposits (30%)

For FMPs with tenure of less than a year, the dividend option is more

appropriate as it results in lower tax incidence compared to the growth

option, which would be taxed at individual income taxslab rates.

FMPs also offer double indexation benefits, which comes into play when

the scheme purchase is made in one financial year and the maturity of the

scheme is after two financial years. Indexation (for tax purposes) allows

returns generated on FMPs to be adjusted for inflation so that investors are

taxed only on the real returns. For example, if a 13-month FMP is launched

in March 2010 i.e. FY 2009-10, it will mature in April 2011 i.e. FY 2011-12.

While the investment is made in FY 2009-10, the redemption takes place in

FY 2011-12. Thus, by investing in FMPs with maturity of a little over a

year, the purchase and sale years are spread over two financial years, called

double indexation, which effectively reduces one's tax liability


Simply put, fixed maturity plans (FMPs) are the mutual fund industries

version of fixed deposits (FDs). Over time, they have established a place in

the portfolios of debt fund investors. Savvy investors sometimes do away

with FDs and replace them with FMPs. So what is it about FMPs that makes

it so appealing to investors and how do they differ from FDs?

1) Returns: Returns are an extremely sensitive subject for fixed income

investors. Its over here that FMPs diverge from FDs in a big way.

FDs offer assured returns, indicated to the investor at the time of

investing. Returns on FMPs are indicative in nature. This can be

understood once you get an idea of how FMPs work.

FMPs are close-ended debt funds. Investments can be made in them only

during the new fund offer period. FMPs invest in debt instruments issued

by corporates and their investments have a maturity that coincides with

the maturity of the FMP. Hence the name - fixed maturity plans.

The investments made by the FMP have an indicative yield. This means,

on maturity, there is a possibility of the actual returns deviating from the

returns indicated at the time of investing. The deviation might not be

significant at the end, but it would still be imprudent to consider FMPs

returns as fixed as in an FD.

2) Taxation: FMPs also differ from FDs in tax treatment of income.

In FDs, the interest income is added to the investors income and is

taxable at the applicable tax slab, also known as the marginal rate of tax.

With FMPs the tax implication depends upon the investment option

dividend or growth. In the dividend option, investors have to bear the

dividend distribution tax (DDT).

In the growth option, returns earned are treated as capital gains (short-

term or long-term depending on the investment tenure).

In the case of short-term capital gains (i.e. if investments are held for less

than 365 days), the interest income is added to the investors income andis

taxed at the marginal rate of tax.

As for long-term capital gains (if investments are held for more than 365

days), the tax liability is determined based on the lower of with

indexation (charged at 20% plus surcharge) and without indexation

(charged at 10% plus surcharge).

With the indexation benefit, FMPs end up delivering more tax efficient

returns than FDs.

3) Tenure:

FDs and FMPs offer equal flexibility when it comes to investment

tenure. From a few months to several years, there are investment options

available across different points of tenure. Investors can select the tenure

suiting their investment objectives and needs.

4) Liquidity:
FDs score over FMPs in liquidity. Being fixed income in nature, there
are restrictions on liquidity in both cases. But FDs can generally be

withdrawn without penalty, unlike FMPs


Traditionally almost around 85% of the people in India invest their surplus

funds in Bank Fixed Deposits, Postal Schemes etc. This clearly indicates

that safety and security of the principal amount is the first priority when it

comes to investment. Nobody cares whether the accretion on such

investment is taxable or not. Also people do not evaluate whether the post-

tax returns will be able to beat inflation or not. Nobody can certainly deny

the importance of safety but one has to always search for and evaluate the

options which are equally safe but can give help you generate better returns

or can give tax advantage over other equally safe investment avenues. It is

important to have debt in your investment portfolio but it should be limited

to certain percentage of total assets depending on time horizon and your risk


Thumb rule says debt must constitute minimum equal to ones age in

percentage terms but it is advisable to allocate funds in debt depending on

time horizon of your particular financial goal. If time horizon for a particular

goal is just 1 year to 1.5 years than 100% of such corpus in debt makes

sense. Most of the investors invest their funds in bank fixed deposit for time

horizon of 1 to 1.5 years. But there are other alternatives available in the

market which can give you better post tax returns compared to bank FDs

and are equally safe. Mutual Funds FMP (Fixed Maturity Plans) are the

better alternative for time horizon of around one year investments compared

to bank fixed deposits which not only gives higher return but are also tax

efficient. FMPs are closed ended schemes with the maturity period ranging

from 370 days to 390 days which are commonly known as 1 year FMP. The

maturity period of FMPs may vary from 90 days to three years but most

prevalent and tax FMPs are one year FMPs.

Here we will discuss the pros and cons of only 1 year FMPs. These schemes

invest 100% of their corpus in debt portfolio which consists of corporate and

government bonds or Certificate of deposits issued by banks which are safe

and rated. The funds thus invested are relatively safe compared to income

funds as the volatility in the interest rates will not affect returns of the fund

as the entire corpus collected in the scheme is invested for the fixed term

which is almost equal to the tenure of the fund. These funds are closed

ended in which investment can be made only during the NFO period. The

schemes get listed at recognised stock exchanges but effectively these are

not traded and volumes are negligible so one has to hold this till maturity for

all practical purposes. Thus they are almost at par with bank FDs as far as

tenure of investment and risk is concerned. The only difference is that in

case of bank fixed deposit you know what return you will get at the time of

making the deposit itself. Whereas in case of FMP the returns are not

guaranteed it is market linked and returns will depend on the return of the

portfolio. However, one can find out as to what will be the indicative

investment return from a particular FMP. The returns on this are higher than

bank fixed deposit because they are floated for identified borrowers and as

the volume size is big, they can easily negotiate for better deal. Moreover,

income arising out from this will be taxable under the head long term capital

gain as the same is held for more than one year and investors get benefit of

indexation. Please note that the benefit of indexation and concessional tax is

not available in case of bank FD.

Since the FMP looks better than bank FD and if one wants to invest in FMP

what one should look for while investing in FMP?

The one most important thing an investor needs to check before investing is

the ratings of the portfolio in which the fund is likely to be invested. The

investors should invest only in the schemes which will invest their funds in

AA+ and above rated papers or bonds. The funds which invest in AA-

papers or bonds or lower rated are riskier and one should be aware of risk

involved in such schemes. For past one year of 1 year FMP is around 10%

and above as compared to b bank fixed deposit rate of 8.50%. Needless to

say an FMP not gives higher return compared to fixed deposits but also has

added tax advantage.


Fixed maturity plans are riskier, but offer better returns

With the end of the financial year approaching, mutual fund houses are back to

launching and re-launching fixed maturity plans (FMPs), a favourite product

of the sector till the tax laws were changed by Finance Minister Arun Jaitley in

Budget 2014-15.
A number of fund houses such as ICICI Prudential, Birla Sun Life, UTI, Tata

and DSP BlackRock have either launched or filed offer documents with the

Securities and Exchange Board of India to launch these products. But, before

investing, one should remember the taxation of this instrument has gone

through a complete change. Though the product remains attractive in terms of

returns, its liquidity has substantially gone down.

Says Hemant Rustagi, chief executive of Wiseinvest Advisors: Now, this is a

product that needs to be compared with tax-free bonds or fixed deposits (FD).

Compared to both, it looks better because of the indexation benefit. Adds

financial planner Suresh Sadagopan: I would recommend it for conservative

people who do not mind locking in their money for at least three years,

because it is virtually tax-free after that.

According to sectoral sources, at present, three-year FMPs offer indicative

rates of around eight per cent, whereas State Bank of Indias three-year fixed

deposit rate stand at seven per cent.

This means a clear advantage, in terms of returns, with some risk for FMPs

because they invest in corporate bonds which can turn risky when times are

bad. But, even if they offer a lower rate of return than fixed deposit,

indexation benefits make them more tax-efficient.

For example, if you are getting 8% from a fixed deposit and FMPs indicative

rate is 7.5 %, the returns will be better in case of the latter. Lets look at some

numbers: Even if we calculate the rate of returns in simple interest, the

investor will earn 24 % in a fixed deposit and 22.5 % in an FMP. A person in

the income-tax bracket of 30 per cent stands to lose 8.33 %as capital gains tax

and earn 15.66 % as return on investment.

An FMP investor will get the benefit of inflation indexation. Assuming

inflation rate to be five per cent annually, the indexation benefit will be 20 per

cent (because for a three-year FMP, the indexation benefit will be of four

years, if you invest before March-end) on returns of 22.5 per cent from an

FMP. The taxation: 20 per cent of 2.5 per cent returns. The difference: A

substantial one six per cent (FD 16 per cent vis-a-vis FMP 22 per cent). Post-

tax returns of over seven per cent annually is quite a good. Only instruments

like Public Provident Fund offer higher post-tax returns, but there are an upper

limit on investment,
However, one needs to be clear that they want to be invested for the entire

period because exiting in the interim will hit them hard. With the change in the

tax guidelines in Budget 2014-15, if you exit an FMP before three years, the

capital gains will be added to your income and taxed according to the income-

tax slab. The instrument, therefore, becomes tax-inefficient and lacks liquidity

in the short term.

Treat these instruments as medium-term tax-saving instruments, dont

withdraw in the interim and you should be fine, advise financial planners.


Handbook on debt (Indian Institution of banking and finance)

Business economics (T.Y.B.COM)

Hindustan times (newspaper)