Fixed maturity plans to lose sheen under Direct Taxes Code

Fixed maturity plans (FMPs) have been very popular with investors because they are more tax efficient than fixed deposits. If the FMP term exceeds one year, the income is treated as long-term capital gains and taxed at a flat 10% or 20% after indexation. In case of fixed deposits, the interest earned is clubbed with the income of the investor and taxed at the normal rate. That is why the 370-day FMP is the most common maturity in this category.

But this is set to change if the Direct Taxes Code (DTC) replaces the Income Tax Act from 1 April 2012. FMPs will lose some of the tax advantage they enjoy under the current tax regime. The DTC will not make a distinction between long-term and short-term capital gains from debt mutual funds.

All gains will be added to the income of the investor and taxed at the normal rate applicable to him. This means if you buy a 370-day FMP today, the gains will be taxed at the same rate as the interest earned on a fixed deposit. So if you want to invest for a period of one year right now, a fixed deposit might be a better bet, given that the post-tax return would be more or less the same.

There's another way in which the DTC queers the pitch for FMPs. As mentioned earlier, long-term capital gains from debt funds are taxed at a flat 10% or 20% with indexation. Indexation takes into account the inflation during the holding period while calculating the cost of acquisition of an asset. The purchase price is adjusted upwards, bringing down the tax liability of the investor.


Right now, if the holding period straddles three financial years, the investor is eligible for double indexation. For instance, if an asset was bought in March 2010 (financial year 2009-10) and sold in April 2011 (financial year 2011-12), it would be eligible for inflation adjustment for two years.

This will change under DTC. For an investment to qualify for long-term capital gains, the asset has to be held for at least one year from the end of the financial year in which it was bought. So if you invest in an FMP right now, the one-year period will start only from 1 April 2012 and the term should extend till 31 March 2013 for the income to be treated as long term capital gains.

Indexation benefits will be available only if the gains are long-term. Obviously a 370-day FMP won't make the cut if you buy right now. But it will do so if it is bought in the last week of the financial year. If you buy in March 2012 and the FMP matures in April 2013, the gains will be long-term capital gains.



Source:- http://economictimes.indiatimes.com/personalfinance/savingscentre/analysis/ET-WEALTHFixed-maturity-plans-to-lose-sheen-under-Direct-Taxes-Code/articleshow/8988777.cms?intenttarget=no


Thanks
Ankit Wani
Intern @ DENIP Consultants Pvt. Ltd.