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Tax benefits of Fixed Maturity Plans (FMP’s)

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fmpFixed maturity plan (FMP) is a great option for conservative investors who seek safety of their capital with decent returns. They have a fixed tenure. Returns are not guaranteed upfront, but can be closely predicted with the interest rate movements. Popularity of FMP’s has grown multi-fold ever since the interest rates began moving upwards.

Tax benefit of FMP is what differentiates it from its peers. Though there are other financial products which offer safety of capital, FMP has gained prominence as a good post-tax returns generating product. Let’s see what kind of tax benefits an FMP has in store for you.

Indexation benefit

This is the first type of tax benefit that you get by buying an FMP. It is known as indexation benefit. This benefit is not specifically given to FMP. It gets this benefit by being a part of debt funds category. Hence, all types of debt funds such as liquid funds, short term debt funds, FMP’s, etc enjoy this indexation tax benefit.

You do not get any benefits when you buy an FMP. However, if you hold it for more than 1 year and then sell it, there will be tax of 10% flat or 20% with indexation, whichever is lesser. Let’s have a look at how this works. Suppose you invest Rs. 1 lakh in an FMP of 13 months tenure. After 13 months, it has grown to Rs. 1,12,000 i.e. it has given returns of 12% p.a or Rs. 12,000. 10% flat tax on the returns would be 1200. As we know, there will be another option of 20% tax with indexation. First, indexed cost of acquisition needs to be calculated for this. The formula for this is:

Purchase price * (CII for sale year) / (CII for purchase year)

Note: CII refers to cost inflation index which is declared every year.

If you take the sale year as 2013-14 and purchase year as 2012-13 for the above example, Indexed cost of acquisition becomes 1,00,000 * (939/852) i.e. 1,10,211. Hence, returns generated would be difference of Rs. 1,12,000 and indexed cost i.e. Rs. 1,10,211 i.e. Rs. 1788. 20% tax on this would be Rs. 357.

Since this value is lesser than 10% flat tax, it would be considered for taxation. You can clearly see a huge difference in savings by using indexation benefit. At times, higher inflation could even make your tax liability nil.

Let’s see how taxation works if the same amount is invested in a fixed deposit which yields the same return i.e. Rs. 12,000 after 13 months. If you are in the highest tax bracket, there will be 30% tax on the returns, which brings the total tax amount to Rs. 3,600. This is how FMP’s are tax efficient compare to FD’s and similar products.

Double Indexation

This is another benefit you can avail by purchasing FMP’s. Suppose you buy an FMP of 13 month tenure in March of FY 2013-14. The maturity of the product will be in April FY 2014-15. By doing this, you are skipping one year and selling it in the next financial year. It means you are spreading your tax liability over two financial years. Moreover, there are enough chances that cost inflation index increases due to higher inflation. This will also lower your total tax liability.

  • Govind Sharma

    Good one
    What are the usual return of FMP in the market
    Are they available in SIP mode?

    • Av Suresh

      Average return is 9-10% p.a. No, you can only buy them in lump sum, sip is not available,

  • suresh

    Good information for Tax payers

  • SK

    It has been suggested that after 68 or so one cannot apply for loan and that one should go for reverse mortgage of one’s house property. What are the pitfalls in this method and how to avoid those? SK

  • Ramamurthy

    I presume you know what is Reverse Mortgage.If you have no knowledge at all pl let me know. I will share with you what I know about it.

    • SK

      I am not very clear about it and want to know more about it specifically about the pitfalls of such a loan. How do banks evaluate the property and what is the best way to pay back. SK

    • Ramamurthy

      I have no practical experience.But from what I know,I do not think there are any pitfalls.The only draw back is if you have any dependents they have to be prepared to forego the title to your property unless they want to buy back the property.
      The banks will evaluate the property as per market rates.I believe the maximum limit is Rs 1 Crore.
      There is no question of pay back unless after sometime you want to pay back the loan .
      If you are serious why dont you contact Central Bank of India .
      They have a good scheme under which they will provide a fairly decent annuity till your and your spouse,s life time.This annuity is NOT taxable

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