Season of 4-indexation FMPs

Mutual Fund Industry | November 21
FMPs are close-ended mutual fund schemes which invests in bonds and other debt instruments. FMP are not linked to stock markets hence they are far safer and meant for conservative investors.
The biggest attraction of FMPs is inflation adjustment or ‘indexation’ (as it is called in technical terms) of cost. Basically, the purchase price is adjusted with inflation which reduces actual gains and hence, lowers the tax burden. Returns from FMPs or debt mutual funds held for the long term (more than three years) are treated as long-term capital gains and taxed at 20% with indexation. 

Most of the FMPs come with a 3-year time horizon offering 3 indexation benefits. However, currently there are FMPs available for tenors over 1200 Days (maturing post March of 2022) and hence, offering 4 indexation benefits.

For eg, if one invests now takes an FMP of 1220 days (3.34 years) one can avail benefit of four 4 years of indexation since practically four financial years will pass i.e. FY 2018-19, FY 2019-20, FY 2020-21, FY 2021-22.

Assuming inflation of 5 percent every year, 100 rupee invested would be equivalent to approximately 116 rupees if three-year indexation is applied. However, it would be equivalent to 122 if four-year indexation is considered.

Assuming all AAA portfolio and 8.5% annualized return from the FMP, Rs. 100 will mature as Rs. 132 (approximately) after 1220 days. Long term capital gain after benefit of four indexation will be only 10 rupees. (132-122)

Hence, the taxable income from FMP is only Rs. 10 and tax amount will be Rs 2 (20% of this gain). Thus, the effective return in investor’s hand is Rs. 130 (132- 2).  Effectively delivering a very high tax-adjusted yield.

If you are looking for 4-indexation FMPs please visit our FMP tab under the Transact < Transact Now section of your Moneyfront login.
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