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FMPs More Than 3 Years Still Score Over Fixed Deposits
A Fixed maturity Plan (FMP) is a closed-ended debt scheme for a fixed period of time, wherein the duration of debt papers is aligned with the tenure of the scheme.
Features of FMPs
- FMPs generally invest in Certificate of deposits (CDs), Commercial Papers (CPs), money market instruments, and corporate bonds.
- FMPs provide predictable return & are not subject to interest rate risk.
- On tax adjusted basis, return on FMPs are better than bank FDs, as 3 years Plus FMPs qualifies LTCG Tax.
Mutual fund investors have the option of paying Long term capital gains tax at 20.6% with or without Indexation.
Tax Advantages of FMP
Fixed Maturity Plans scores high on tax advantage when they are compared to similar instruments like
Fixed Deposits (FDs). In FDs the interest earned is added to the investor’s income and taxed at individual personal income tax rate. Interest from Fixed Deposits is categorized as ‘Income from Other Sources’ under the Income Tax laws. In the case of FMP, the tax implication depends upon the investment option chosen – Dividend or Growth
Which Option Should You Choose?
i. Dividend Option: Dividends in FMPs are tax free in hands of investors. However, Mutual Fund companies have to pay a Dividend Distribution Tax (DDT) of 25% plus surcharge and cess for Individuals and HUFs (28.325%) and 30% plus surcharge and cess for others (33.99%) before distributing it to investors.
ii. Growth Option: If any investor opts for Growth option, he is subject to Capital Gains Tax.
iii. Short Term Capital Gains (if units are held for 36 months or less) are taxed as per the Tax Slab Rate.
For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not in the case of FDs.
The length of the holding period matters, especially when one has to decide between growth and dividend options. Investors can go for the growth option if the holding period is more than three year and for the dividend option if the holding period is less than three year.
For more information please visit:- http://rrfinancialconsultants.wordpress.com/2014/08/19/fmps-more-than-3-years-still-score-over-fixed-deposits/
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