Fixed Maturity Plans (FMPs)
These are closed ended mutual funds that predominantly invest in debt instruments. They can be subscribed through the NFO (New Fund Offer) and redeemed only upon maturity. They are relatively stable and specify in the Scheme Offer Document (SOD) the category of debt instruments in which the fund manager would place your funds. They have gained popularity in the recent 2-3 years due to high yields in Indian bond market. Their tax efficient nature makes them a preferable choice when compared to liquid/debt funds. The only disadvantage is that the funds are illiquid for the entire tenure of the fund.
Taxation of FMPs
Fund houses issue FMPs with fixed tenure such as 370 days, 500days or 730days. As the tenure is more than 365days / 1year, these securities qualify as long term investments and hence could avail a lower capital gain tax. Long term capital gain tax for FMPs is the lower of 10% without indexation or 20% with indexation benefit. Due to the indexation benefit, the tax realized is much lower than other instruments such as fixed deposits, making it very attractive to investors in the 20% or 30% tax bracket.
How does it work?
Lets say you have Rs.10Lacs in a bank F.D that yields a 9% interest p.a amounting to Rs.90000, on which a TDS of 10.3% is applicable. So, your net interest from your 10 Lac FD is Rs.80730 (8.07%). In case you've deposited this 10Lacs in a 370days FMP with return of 9%, by availing indexation benefit, your tax is Rs.0, so you get a net return of Rs.90000. The difference between the FD and FMP return is Rs.9270 in 1 year. If you continue to roll over the FD for say 10 years, you'd lose Rs.1.45Lacs cumulatively (vs) investing the same Rs.10Lacs in an FMP. It is worse if you're in the higher tax bracket - over a 10 year investment horizon, you stand to lose Rs.2.90Lacs if you're in the 20% tax bracket and Rs.4.35Lacs if in the 30% tax bracket. Talk to your financial planner to understand how to re-balance your FD portfolio to take advantage of the tax effectiveness of FMPs.
Is FMP for you?
FMPs could be a good parking avenue if you are holding onto funds in the short term (1-2 years) and expecting to pay for a liability or expense at the end of the 1-2 years period. In case you are overweight on fixed deposits, you may try shifting some to FMPs. However it is best advised that you consult your planner prior to choosing a FMP and to understand its capital gain aspect. For investors in the higher tax brackets and with low risk profile, the tax efficiency of FMP is a nice incentive especially in this high-inflation era. Remember that 80c can do only so much for you since it is availed downstream - if you need to save tax and turn those tax savings into good returns, it is important to choose the right investment vehicle upstream!
Taxation of FMPs
Fund houses issue FMPs with fixed tenure such as 370 days, 500days or 730days. As the tenure is more than 365days / 1year, these securities qualify as long term investments and hence could avail a lower capital gain tax. Long term capital gain tax for FMPs is the lower of 10% without indexation or 20% with indexation benefit. Due to the indexation benefit, the tax realized is much lower than other instruments such as fixed deposits, making it very attractive to investors in the 20% or 30% tax bracket.
How does it work?
Lets say you have Rs.10Lacs in a bank F.D that yields a 9% interest p.a amounting to Rs.90000, on which a TDS of 10.3% is applicable. So, your net interest from your 10 Lac FD is Rs.80730 (8.07%). In case you've deposited this 10Lacs in a 370days FMP with return of 9%, by availing indexation benefit, your tax is Rs.0, so you get a net return of Rs.90000. The difference between the FD and FMP return is Rs.9270 in 1 year. If you continue to roll over the FD for say 10 years, you'd lose Rs.1.45Lacs cumulatively (vs) investing the same Rs.10Lacs in an FMP. It is worse if you're in the higher tax bracket - over a 10 year investment horizon, you stand to lose Rs.2.90Lacs if you're in the 20% tax bracket and Rs.4.35Lacs if in the 30% tax bracket. Talk to your financial planner to understand how to re-balance your FD portfolio to take advantage of the tax effectiveness of FMPs.
Is FMP for you?
FMPs could be a good parking avenue if you are holding onto funds in the short term (1-2 years) and expecting to pay for a liability or expense at the end of the 1-2 years period. In case you are overweight on fixed deposits, you may try shifting some to FMPs. However it is best advised that you consult your planner prior to choosing a FMP and to understand its capital gain aspect. For investors in the higher tax brackets and with low risk profile, the tax efficiency of FMP is a nice incentive especially in this high-inflation era. Remember that 80c can do only so much for you since it is availed downstream - if you need to save tax and turn those tax savings into good returns, it is important to choose the right investment vehicle upstream!
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