what is better – bank deposit or FMPs?

What is better — A Bank Deposit or a FMP?
Lately the interest rates on bank deposits have increased leading many investors to wonder whether a simple Bank Fixed Deposit (FD) would serve better than having to go through the process of investing in an FMP. Though Bank FDs and FMPs currently offer a similar rate of return; the tax impact tilts the scales in favour of the FMP.

Interest on Bank FDs is fully taxable whereas the return from FMPs is either subject to the Dividend
Distribution Tax (for the dividend option) or the capital gains tax
rate (for the growth option). The Distribution Tax rate @14.16% or the
capital gains tax rate @10% are lower than the income tax rate,
especially in the case of investors in the higher tax bracket. Tax
directly eats into returns, which is why FMPs have the edge over Bank
FDs.

To illustrate this point, have a look at
the following table. It is assumed that both, the Bank FD as well as
the FMP yield the same rate of interest i.e. 10.25% p.a. An investment
of Rs. 1 lakh is made in an FMP of 91 days. The corresponding figures
for the Bank FD appear alongside.


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