Hi ,
I am in highest IT bracket and have huge FD's booked at rate of 8.75% rate . Do advised me should i break these FD's and put them in FMP or liquid funds ???
1 Answers
You should definitely switch to FMPs to earn better rate after taxation.
As you are in highest tax bracket, you are effectively earning around 6% interest after 30.6% tax. Income tax on FMP's gain would be 20% with indexation benefit or flat 10% without indexation benefit, if gains are after one years of investment.
Say if you invest in March 2013 for a 13 month FMP (which ends in April 2014), you may have to pay 0 tax on gains as per below computation:
Purchase Year = A, Purchase Cost = P, Cost Inflation Index (CII) for purchase year = X
Sale Year = B, Selling price = Q, CII for sale year = Y
Indexed Purchase price = P x (Y/X) = R
Long term capital gain = Q - R = S
Income tax on capital gain = S x 20%
For example, if you would have invested 1 lakh and March 2011 for 13 month FMP, redemption of units is done in April 2013, above computation would look like this:
Purchase Year = 2010-11, Purchase Cost = 100000, Cost Inflation Index (CII) for purchase year = 711
Sale Year = 2012-13, Selling price = 112000, CII for sale year = 852
Indexed Purchase price = 100000 x (852/711) = 119831
Long term capital gain = 112000 - 119831 = -7831
FMPs are closed ended fund, you cannot withdraw in between. If you don't want to lock-in money, you can invest into other debt based mutual funds. Liquid funds may not be best choice here as they generate less interest but does not have lock-in of even a day.
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