Banks have been luring investors by offering attractive deposit rates, but FMPs, with tax-adjusted returns, still score higher. Fixed Maturity Plans, FMPs, are as attractive as Bank FDs in terms of interest rates. Further, on account of lower taxes on MFs, post tax returns from FMPs is far better. Currently 90 day Bank FD offers 5.50-5.75% whereas FMPs of 90 days are offering 6.85-7.10%. FMPs combine tax efficiency of MFs with the safety of fixed deposit. FMPs generate significantly better post tax returns.
Taxation Aspect The interest earned on Bank FDs has to be added to the income of that year and tax is to be paid as per your tax slab. But in a FMP for a tenure of lesser than a year if the investor chooses the dividend option then he can just come out by paying a 14.03% or 22.44% dividend distribution tax, depending upon the individual or corporate investment category respectively, which is deducted by the MFs at the time of distributing the dividend. The attraction increases when the term selected by the investor is over 365 days. Let's consider a bank FD offering 8.00% and an FMP offering 8.00%. In a bank FD the investor have to pay 30% tax (if you are in the highest tax bracket). So his post tax return is 8.00% minus 30% tax on it, which leaves you with a paltry 5.60% post tax returns.
Whereas, in FMPs he needs to pay just 10% concessional Long Term Capital Gain Tax without indexation or 20% with indexation for investments of over a year. So his post tax return is 8.00% minus 10% tax on it, which leaves him with a 7.20% post tax returns. In institutional plans, corporates earn additional 0.25% – 0.40% pa returns. Though banks are offering 8.00% for 366-390 day deposits, the rate of interest is lower on higher terms. Banks are offering 7.50% (8.00% for Senior Citizens) for terms over 2 years and attract the usual 30% tax (for highest tax bracket individuals) whereas FMPs offer 8-8.10% returns.
How does a FMP work? FMPs produce predictable returns over the desired timeframe since the maturity of the portfolio matches the tenure of fund schemes. Unlike other schemes that suffer from volatility and, hence, risk of erosion in asset value, an FMP – structured as closed-end funds – carries no interest rate risk. Whether yields rise or fall, the asset value of these schemes is protected as deposits / bonds are held to maturity. FMPs, being close-ended, are available for investment only during their initial offering. They are available at the face value of Rs 10 per unit. These schemes don't levy any entry load. Minimum investment normally is just Rs 5000/-.
Other AlternativesIn such scenario, where you may need your funds back at short notice, Liquid funds should be preferred over bank FDs & FMPs. Liquid funds have no specific term and can be withdrawn anytime. In Bank FDs. if you make 15 days FD and renew every 15 days, you will lose on the interest rate. If you make a 6-month bank FD and if you have to prematurely withdraw it, you pay 0.50% penalty on the applicable interest rate for that period of deposit. In FMPs, if you have to prematurely withdraw it, you pay an exit load.
Banks are offering 8.00% (compounded yearly) for 5 years lock-in FDs under section 80C. They can't be withdrawn prematurely. No loans are available on it. NSC seems to be a comparable option with 8.00% for 6 years (compounded half-yearly – yield 8.16%). Loans are available against NSCs. Also the accrued interest is eligible for 80C deduction.
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