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Multiple indexation under Fixed Maturity Plans (FMPs) offer tax free return on investment plus future tax cuts! 

Saraswat had invested Rs.40,00,000 in March, 2012 in a 13 months Fixed Maturity Plan (FMP) offered by a leading Mutual Fund. The return on investment upon maturity of this FMP in April, 2013 works out to 11% per annum and accordingly Saraswat is fortunate to earn Rs.4,40,000. The real icing on the cake is that this 11% annualized return is reaped by him totally tax free. How does this work?

Saraswat’s return on FMP investment over the holding period of more than 12 months qualifies as Long term Capital Gains (LTCG) and is entitled to enjoy the double indexation benefit. The Cost Inflation Index (CII) for FY 2011-12 was 785 and for FY 2013-14 is 939. On the basis of the same, against his cost of Rs.40,00,000 in 2011-12, the indexed cost would work out to Rs.47,84,713. Keeping in view the maturity consideration of Rs.44,40,000 received by Saraswat, he is in a position to show a notional loss of Rs.3,44,713. Thus on his actual return of Rs.4,40,000, not only will his income tax liability effectively work out to zero, but he will also enjoy the benefit of setting off the notional long term capital loss of Rs.3,44,713 against any taxable LTCG earned by him in FY 2013-14 or thereafter and thus avail a further tax saving of Rs.71,011 (computed @ 20.6% on 3,44,713).


FMPs are investment schemes floated by mutual funds and are close-ended with a maturity period ranging from three months to five years. The objective is to lock into a certain rate of return on risk-free or highly-rated assets at inception, thereby protecting the schemes against market fluctuations. FMPs invest in Commercial Paper, Certificate of Deposits, Debentures, Bonds, Securitized debt, Money Market instruments and the like.

Since SEBI did not permit offering of any ‘guaranteed returns,’ FMPs earlier used to show ‘indicative returns.’ However, as per its latest directive in 2011, SEBI now does not permit a Mutual Fund offer document to even show any indicative FMP returns. This means the investor would be required to do the research on current commercial ongoing rates of the same maturity as of the FMP and guess approximate returns, assuming that the particular fixed maturity fund invests in quality commercial deposits and Government securities.

In this context, investing in a Mutual Fund FMP (where the return is based on a guess factor) is indeed a more challenging investment decision, than investing in a Bank FD which promises a guaranteed return.


However, investment in FMPs scores high above Bank FDs, when it comes to comparing the tax advantage.

Investment options in FMPs are available under the growth scheme. Under the provisions of Section 112 of the Income-tax Act, LTCG earned on FMPs under the growth option is liable to be taxed at 10.3%, without indexation, or at 20.6% after availing the benefit of indexation. Growth schemes, which enjoy the benefit of indexation (or even multiple indexation) under capital gains can effectively offer virtually tax-free returns, as highlighted in the illustration of Saraswat discussed hereinabove.

For this reason, higher tax bracket investors prefer investment in FMPs under the growth option as compared to bank FDs, which offer similar returns, but are liable to tax upto 30.9%. The break even rate of interest before tax in the case of a growth option FMP yielding a 11% return, thus actually compares to a 15.92% return on investment, in the case of a taxpayer in the maximum bracket of 30.9%.


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