To reduce the income tax for the Fixed deposit

vignesh 946
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Dear pankaj

I have not answered and asked any questions for so long time.

I am first of all very happy to see the colourful UI which makes everyone to ask a question.

Saw your fb pics. Good ! Want to visit tat place once in my life time.

First of all thank you so much for the kind of platform where i started my financial quest and still learning every day.

I am actually doing my father s income tax returns . At that time I realised my father is getting an FD interest of 1.38 Lakhs. so approx (13 lakhs principal). He is in the 10 Percent slab.

he has completed his 80c and other possible deductions.

How i can effectively reduce the tax on the fixed income products? - Debt Mutual funds can be ans. as the returns can be indexed based on the CII number.

there are many varities in the Debt Mutual fund.

  1. How can a common Investor understand and invest in debt mutual fund and make returns?

  2. what ratio can i maintain for the debt mutual fund and FD in case my asset allocation says 50 percent debt products?

Pls guide me on this. I am little scared that as i want to save tax i should not lose my capital or get lower returns than FD

minimize-tax debt-mutual-fund fixed-maturity-plan fixed-deposit mutual-fund income-tax
1 Answers

Fixed maturity plans (FMPs) are similar to bank fixed deposits and provide similar returns. However they have less liquidity than bank FDs and are close ended funds. Once invested, money is locked for its full term.

If you looking for open ended funds (can be bought/sold anytime), long term debt funds are the category you can look for.

Both FMPs and long term debt plans are safe to invest. As they don't invest in equities, their return won't be negative.

As such, there is no need to maintain ratio in bank FD and debt MFs/FMPs. You can choose to invest whole 100 percent amount into FMPs if you are sure that you won't need money in the mid term.

FMP would generally provide better return after taxation than bank FDs. To maximize CII benefit, invest in end of March for period like 390 days. This would make sure that amount comes back in next to next financial year.

Below is an example of income tax computation on 1.4 lakh returns generated on an FMP invested in March 2012 for 13 lakhs which ended in April 2013.

Purchase Year = 2011-12, Purchase Cost = 1300000, Cost Inflation Index (CII) for purchase year = 785
Sale Year = 2013-14, Selling price = 1440000, CII for sale year = 939
Indexed Purchase price = 1300000 x (939/785) = 1555032
Long term capital gain = 1440000 - 1555032 = -115032

You can see as per taxation rules, its infact a long term capital loss (and hence no income tax is payable on this >10% return), which can be adjusted with other gains or carried forward to next years.

Pankaj Batra5212
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