Tax Free Fixed Income – Time for Double Indexation !

From now till March 31,2013 is great period for TAX FREE fixed income investment.

1) Fixed maturity plans are currently yielding around 9.5% to 10.5%.

2) Choose a Fixed Maturity Plan (FMP or FTP) of more than 15 months duration or any FMP maturing after 2-April-2014.

3) If you buy a fixed maturity plan of 15 months tenure before March-31, 2013, you will be eligible for double indexation benefit. The plan will mature in Financial Year 2014-2015 ( That is after 2-April-2014).

4) Since inflation is running at 7% rate, with double indexation, the probability of your return being taxed is almost nil. Your expected Gross return will be around 12%-14% ( for 15 months duration); With double indexation benefit, this return will be tax free. [ Indexation Benefit uses 20% tax on the real return, adjusted for inflation]

5) Clients of RRK Advisory can get help from us to identify the right fund. Just send us an email with amount you plan to invest.

Compare with the Tax Free NCDs :
Compare this with Tax Free NCD issued by PSU for 7.5% rate with very long lock-in period and poor liquidity. You get 2% more return, Tax Free, complete liquidity in 15 months and no need for demat account.

Compare with Fixed Deposits:

Fixed Deposit rates are coming down and currently at 7.5% at ICICI Bank for 1 year duration and 8.5% with SBI. The interest from bank deposits are subjected to taxes and after tax return will be 5.25% to 6%. Compare this against 9.5%-10.5% tax free return !

Is there any catch ?

Technically, all these closed ended funds are listed in the stock exchanges, in case of urgent need, these can be sold in the stock exchange and investor can recover the invested amount.

But it is highly likely, there may not be a suitable buyer at the time you want to sell them, due to low transaction volumes for FMP. So, for all practical purposes, I suggest you must assume that there is no liquidity for this FMP and you should only invest if you don’t need this money until maturity. ( 15 months)

References:

a) Why fixed maturity plans (FMPs) will fetch you more than Fixed Deposits ?

Please read this article from Economic Times for more details.

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/why-fixed-maturity-plans-fmps-will-fetch-you-more-than-fixed-deposits/articleshow/12420362.cms

b) What funds are available to buy now ?

Get the list of FMP available for investment here.
https://www.fundsindia.com/content/jsp/admin/gSpcSchmLst.do?prcsMd=nfo&show=more

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