Investors can take advantage of Investing in Double Indexation FMP’s

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

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