FMP better than FDs?

(5% indexation p.a assumed)
Fixed Maturity Plan or FMP is the right choice for fixed and tax-free returns if you are among those in the higher tax band. While investing for 14-16 months will be ideal to realize tax free returns, the maturity period differs from 15 days to 5 years.

The maturity period for most of the new offers are a little more than 12 months or 24 months so as to take advantage of indexation before the financial year ends. If the inflation rate has grown significantly, then the investor probably will end up paying ZERO tax.

The benefits of investing in FMP are

Higher returns as dividend distribution tax is less as compared to Fixed Deposits
Less or no tax on the returns
Even if the double indexation advantages are not considered, one can easily save around 22-23% tax.
Income taxable under “Capital Gains” as compared to “Income from other sources” in case of Fixed Deposits if period exceeds 13 months.
Multiple years Indexation can be claimed depending on the period.

But have a look at the risks of investing in FMP as well

To discourage withdrawals ahead of time, the exit load is high between 50-100 basis points.
Also, the quality of securities in which the money collected under FMP is invested has to be considered.
Though actual returns may be higher, there is no assurance with respect to returns.

Investment during the close of financial years is ideal in case of FMP as they offer almost 9.25% return for 90 days period and about 9.5% for a year and 3 months period.

All about gaining from Indexation

Indexation refers to the rate calculated to correct the cost of acquisition considering the inflation rate. The difference in maturity and corrected cost of acquisition amounts to capital gain.

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