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Tax implications on Fixed Maturity Plans

FMPs are debt instruments coming from Mutual Funds.

A Fixed Maturity Plan (FMP) is a fixed income scheme and generally is 100% equity free. FMPs have a fixed life and a definite maturity date i.e. they are closed ended schemes and once closed you can't invest in that FMP and hence they are called as Fixed Maturity. 

Post the maturity date the fund ceases to exist and your investment along with the appreciation is automatically returned back to you.

 FMPs invest in Commercial Paper, Certificate of Deposits, Debentures, Bonds, Securitised debt, Money Market instruments etc. So, an FMP is also a 100 per cent debt instrument. 

Also refer How to Redeem Fmp's (Fixed Maturity Plans)

The maturity amount is not fixed they don't guarantee fixed rate of return,  As per SEBI regulations, the portfolio and the indicative returns of the FMP cannot be disclosed by the Mutual Fund house, but they offer better post tax returns. How???

How FMP is better compare to bank FDs

In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab (or the marginal rate of tax).

As far as FMPs are concerned, the tax implication depends upon the investment option – dividend or growth. 
 In the dividend option, the FMP issuer deducts the dividend distribution tax and thereafter there is no tax liability in the hands of the investors. 
Whereas in the growth option, returns earned are treated as capital gains i.e. Long Term Capital Gains enjoy indexation benefits and Short Term Capital Gains are added to income of investor and taxed accordingly. 
  • The investor in this example falls in the highest tax bracket
  • The 10 % return used in the example for FMP is for illustrative purposes only and not assured and the actual returns may go up or down depending on the market conditions. The Fixed Deposit rate is also for illustrative purposes only.
  • In case of FMP; all accretions are assumed paid on maturity

The interest earned on bank FDs is taxable according to the income tax bracket the individual belongs to. So an investor in highest tax bracket holding a 10 per cent FD will effectively earn a post tax yield of 6.6 per cent. This is not in case of FMPs. This is because FMPs with maturity of more than a year are eligible for inflation indexation benefits where returns are taxed at 10 per cent without indexation and 20 per cent with indexation whichever is beneficial for investor. 

Dividends declared in FMPs are completely tax-free in your hands though the fund deducts a Dividend distribution tax of 14.1625% at source.

They invest in bonds having similar duration as that of the FMP. They can’t assure guaranteed returns but can give indicative yields based on yield to maturity (YTM) of the invested bonds.

Taxability of Fixed Maturity Plans

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. 

Indexation is the process by which the inflation is taken into account when computing the tax liability to understand indexation.

  • Long-term capital gains (investment of more than a year) enjoy indexation benefits. The tax liability is computed using two methods i.e. with indexation (charged at 20% plus surcharge) and without indexation (charged at 10% plus surcharge); the tax liability will be the lower of the two. 
  •  Short-term capital gains are added to the income of the investor and taxed as per his/her slab.

Also refer

Tax implication on Gold ETF, Gold FOF, E-gold and gold in physical form

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