3 reasons you will be forced to go for Fixed Deposits instead of FMPs

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3 reasons you will be forced to go for Fixed Deposits instead of FMPs
The recommendations of the Union Budget 2014 may have come as a bolt from the blue for non-equity mutual funds. Hitherto, debt mutual funds including the popular Fixed Maturity Plans (FMPs) remained tax efficient than bank deposits.

But, Finance Minister Arun Jaitley's recommendations in the Union Budget have made things tougher. Here are 3 reasons why you should now opt for bank deposits, especially if you are in the 10 and 20 per cent tax bracket.

Long term criteria changed

Long term for non equity mutual funds hitherto the Union Budget was defined as 1 year. So, investors chased Debt Funds, including FMPs, Monthly Income Plans and Gold Funds and sold the scheme after one year. However, they no longer can do so. Investors would now have to hold the Scheme for three years to end-up paying long term capital gains as against the earlier period of 1 year.

Long term capital gains rate hiked

While earlier, investors were paying 20 per cent long term capital gains tax with indexation or 10 per cent without indexation, that has changed after the Union Budget. Now, investors have to pay 20 per cent capital gains tax.

Double indexation benefit goes

The Government has been smart enough to understand that Fixed Deposits suffered, because of the double indexation benefit accorded earlier to non equity schemes. Let's cite an example. If you invested in a 380-day FMP on March 28, 2014, the same would expire in April 2015. What this meant is that you could claim double indexation benefit since you invested for two financial years.

Now, if the FMP generates a return of 9.2%, you may never end-up paying tax, since indexation for two years, takes care of the capital gains. In the case of bank deposits, if you earned 9 per cent as interest your post tax yield would be 8.1 per cent, if you were in the 10 per cent tax bracket and only 7.2 per cent in the 20 per cent tax bracket and 6.5 per cent in the 30 per cent tax bracket. So, it was better you invested in FMPs.

Read more on FMPs and Double Indexation benefits here

Conclusion

With the definition of capital gains undergoing a change in the Union Budget and the capital gains being increased to 20 per cent, fixed deposits may now become a better option than FMP and other non equity mutual funds. This would be particularly true for those in the 10 and 20 per cent tax bracket.

GoodReturns.in

Story first published: Tuesday, July 15, 2014, 9:40 [IST]
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