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Characteristics-FMP |
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Benefits-FMP |
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Tax Implications
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Mutual Fund industry offers a unique option to invest funds at very attractive TAX
EFFICIENT returns by investing in FIXED MATURITY PLANS (FMP) Pure DEBT schemes.
FMP investment is 100% Equity-Free. FMP is a fixed tenure, debt investment instrument
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Recent different Mutual Fund FMPs offer a very lucrative net to expenses indicative
return. Generally FMP offer slightly higher rates to Institutional Investors.
FMPs are offered by reputed Mutual Fund houses for different fixed time horizon
like Fixed Deposits i.e. for 370 / 180 90 /30 days. Money generally goes in AAA
/ AA / P1+ rated debt instruments, like Govt. Securities, Certificate of Deposits,
Corporate bonds / Debentures, Commercial papers. Exit option is also available with
exit load.
The beauty of FMP lies in it TAX EFFICIENCY, which makes a difference to the Net
Yield you earn on investments.
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A Fixed Maturity Plan is a closed-ended debt fund with a fixed tenure that invests
in a portfolio of debt and money market instruments maturing in line with duration
of the scheme.
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- The FMPs can be of different maturities ranging from 15 days to 5 years.
- FMPs invest in a portfolio consisting of bonds, govt. securities, fixed deposits,
CPs, NCDs, CDs and money market instrument.
- FMPs have fixed maturity and the portfolio manager tries to match the maturity of
papers with the scheme maturity.
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- FMP is a reliable tool to nullify the impact of interest rate fluctuations on one
debt portfolio.
- FMPs are available for different time periods.This gives the investor a choice to
match his investment horizon to the FMP maturity.
- FMPs offer uniform handsome returns for both short and long term investment horizon.
- FMPs are very tax efficient because indexation benefits are available in these plans,
which makes post tax returns very attractive compared to other fixed instruments
particularly Bank FDs.
- Unlike Fixed Deposit interest, Gain generated from FMPs does not add to income.
- Taxed as Capital Gain instead of Income.
- Dividends are tax free in investors hand. Only 14.16% Dividend Distribution Tax
is to be paid by the Mutual Fund.
- The individual investor has access to a far wider spectrum of fixed income securities.
- Fund management expertise.
- Specified maturity date.
- Premature withdrawal possible at NAV price with exit load.
- Predictability of Returns.
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For Resident Indians
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Short Term Capital Gain is taxed at marginal rate of taxation.
Long Term Capital Gain is taxed at 10% (without Indexation) or 20% (with indexation).
Dividend Distribution Tax :
- 14.16 % for individuals & HUF
- 22.66 % for institutions
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For Dividend option : Dividend paid to investors is TAX FREE under Income
Tax but attracts Dividend Distribution Tax (12.5%). The responsibility of deduction
of DDT(Dividend Distribution Tax) is that of Mutual Fund while distributing the
dividend. So the credit you get in your account as fund dividend is net of DDT and
you need not to pay any further tax on it.
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For Growth option :
Long Term Capital Gain Tax for >365 days schemes TDS will be deducted @ 20%
Short Term Capital Gain Tax for <365 days schemes TDS will be deducted @ 30%
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Tax Advantage of FMP over FD
- The tax treatments on interest income for both FMPs and FDs are different.
- Interest income from FDs is added to the investors income and is taxable at the
applicable tax slab for that investor. Interest from FDs is categorized as ˜Income
from other sources under Income Tax laws.
- In the case of FMPs, tax implication depends on the investment option Dividend or
Growth.
- In the Dividend option, investors have to bear dividend distribution tax , whereas
in the Growth option returns earned are treated as capital gains (short-term or
long-term depending on tenure of investment).
- Thus,due to indexation benefit, FMPs end up becoming more tax efficient than a FD.Indexation
lowers tax liability.
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