Fixed maturity plans (FMPs) offer investors the twin benefits of investment and tax savings. Not so popular among investors, FMPs are a fixed tenure, closed-ended mutual fund (MF) scheme with characteristics similar to that of a bank fixed deposit (FD).
Under an FMP, funds are invested at the time of initial offer for a stipulated time and can be redeemed only at the end of the lock-in period. Usually misunderstood to be equitylinked schemes, FMPs are, in fact, pure-play debt funds. Funds under FMPs are invested in debt and moneymarket instruments including corporate bonds, commercial papers and certificates of deposit, etc, and in government securities as well.
FMPs are issued with different maturity periods like three or six months or one, two and three years. What makes FMPs different from FDs is the return profile and tax treatment.
Return profile under FMPs and FDs:
Unlike FDs, returns are not guaranteed under FMPs. FMP offers an indicative return, also known as the indicative yield. It is based on the returns offered by the underlying financial instruments that FMP invests into and tends to vary from the actual returns at the time of maturity.
FMPs are more suitable to investors with higher risk profile. To compensate for the inherent risk, FMPs offer relatively higher returns. Further, even though returns are not fixed, FMPs do offer a greater liquidity to investors as they can trade on exchanges.
TAX TREATMENT:
FMPs differ significantly from FDs and offer a higher flexibility to investors when it comes to tax on returns. Unlike FDs, wherein the interest income is taxed as per the investor’s tax slab, the tax treatment for FMPs depends upon two options: dividend or growth.
The dividend options of FMP scheme attract 12.96% dividend distribution tax (DDT), which is deducted at the source. Returns from the growth option are subject to capital gains tax, which can be either short term (STCG) or long term (LTCG) depending on the tenure. If an FMP is sold within a year of purchase, STCG tax would be charged based on the existing tax slab for the investor.
For tenure higher than that, LTCG tax depends upon whether the investor opts for indexation or not. LTCG without indexation attracts 10.3% tax whereas it is 20.6% under indexation.
The power of indexation Indexation is a mechanism that allows the investor to adjust the return rate of an FMP-growth instrument for the rate of inflation during the tenure. It is a powerful tool that makes FMPs more lucrative than FDs.
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Source: ET
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