FMP vs FD

Why are FMPs better than FDs?

About FMPs
Fixed Maturity Plans are debt mutual fund schemes. FMPs have a fixed maturity date. It could be 15 days, 30,
90, 141, 180 or even 365 days. Some even have a three or five-year time frame. FMPs invest in fixed income
instruments, like bonds, government securities, money market instruments (very short-term fixed return
investments), to name a few FMPs can be open ended or close ended, however many of them are closeended meaning investors cannot withdraw before the end of the term expires.
WHAT IS THE DIFFERENCE BETWEEN FMP & BANK FD?
FMP & Bank FDs are both similar, both give you assured returns. However, the returns in Bank FD is
guaranteed and you know what you will get and when. However, in case of FMPs, the returns are only
indicative and not guaranteed. But you can be sure of your returns as the scheme invests in highly graded
instruments.
WHY SHOULD I INVEST IN FMPs?
FMPs provide various tax advantages like:
If you invest in an FMP, the dividend is tax-free in the hands of the individual investor.
If you invest in the growth option of the FMP for less than a year, the gains are added to the investor's income
and taxed at the investor's slab rate.
If you invest in the growth option of the FMP for over a year, you pay either 10% capital gains tax without
indexation or 20% with indexation.
Consider an example of an investor investing in an FMP:
An Investor takes advantage of double indexation by investing in March of year 1 (FY 2012-13) and then
selling in April of year 3 (FY 2014-15). This virtually brings down the tax impact to a very low level if not to
zilch. This means whole yield on such investments becomes tax free.

Double indexation would kick in if you invest in the first financial year and sell in the third financial year. So if
you invest now in March 2013 (financial year 2012-13) and sell your investment in April 2014 (financial year
2014-2015), you can get the benefit of double indexation. This may help you to reduce your tax liability on
long-term capital gains that will arise on redemption of mutual funds. Suppose you invest 1 lakh in an FMP in
March 2013, with say an average portfolio maturity of five years. Now you will get accrued interest of
approximately 9% on this investment. Now, as per tax laws, you have the option of paying tax on long-term
capital gains with or without indexation. Assuming a 9% p.a. return on your investment, your total fund value

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will be 1,10,635 (investment 1,00,000 and a capital gain of 10,635) in April 2014 . Now the tax calculation
works as follows: The CII (cost inflation index) for the year 2012-13 is 852. Assuming 7% inflation, for the next
two years, the CII for 2013-14 will be 911 and that for 2014-15 will be 975. If the debt fund is redeemed in
April 2014, you can also take into account the CII of 2014-2015. Capital gain with double indexation in this
case will be 1, 10,635 - 1,14,437 = (-) 3,802. Thus, as per the calculation, you make a loss of 3,802. That means
you will pay zero tax, or your returns are tax- free. In fact you can even carry forward this loss for eight years
and can set it off against long-term capital gains.

FMP (with
indexation)
Investment
Amt.
Return
Duration of
investment
Maturity Value
Inflation rate
of indexation
Indexed Cost
(double
indexation)
Capital Gains
Tax rate
Tax
Post tax gain
Post tax Return
(Annualized)

Comparative Return FMP v/s FDs (Post tax):

FMP (without
Fixed Deposit
indexation)

100000

100000

100000

100000

100000

9.00

9.00

9.00

9.00

9.00

14 months

14 months

14 months

14 months

14 months

110635

110635

110635

110635

110635

7%

NA

NA

NA

NA

114437

NA

NA

NA

NA

-3802
20.6%
Nil
10635

10635
10.3%
1095.4
9539.6

10635
30.9%
3286.21
4416

10635
20.6%
2190.81
3489

10635
10.3%
1095.4
9539

9%

8.12%

6.22%

7.14%

8.07%

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