It is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.
The opportunity arises every year from mid-feb until financial year ending i.e March 31
You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .
With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)
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). These funds are available from leading Asset Management Companies (AMC’s) like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s
The estimated current yields on these FMP’s should be in the range of 9.5 %.
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. Please note that the drawback of investing in FMP’s is illiquidity.
The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%
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.
February 20, 2013 Tax Planning