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Thursday, March 27, 2014

FMPs Double Indexation Benefit

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As the financial year comes to an end, distributors are nudging investors to park their money in fixed maturity plans (FMPs) with tenures of 370-380 days. Distributors say investors can make anywhere between 9.0-9.5% on these as investments made in March will fetch them the benefit of double indexation at the time of redemption, which will make their tax liability zero or negligible . Moreover, the current rates are extremely attractive, they add. “Liquidity is tight in the last month of the financial year. It makes sense to lock money at the current rates and earn high returns. Investors will also get the benefit of double indexation, which will make returns virtually tax-free,” says Deepali Sen, a Mumbai-based certified financial planner. Currently, FMPs from Birla Sunlife (372 days), DWS Mutual Fund (373 days), HDFC Mutual Fund (378 days), ICICI Prudential (376 days), among others, are available for subscription.


Double Indexation Benefit


Double indexation helps in reducing tax liability significantly by stretching your investments over three financial years. For example, when you invest in a 375-day FMP before March 31, your investment is spread across three financial years. Assume you invest . 1 lakh in a 375-day FMP in March 2014. Chances are you could earn 9.2-9.5% for 365 days (1 year). This means you will earn . 9,500 as capital gains on your investment of . 1 lakh and your total investment value will be . 1,09,500 in April 2015. Now, if you claim double indexation benefit, the value of your . 1 lakh investment would be . 1,14,483.


This is how it works. The government releases cost inflation index (CII) every year to adjust the cost of purchase of an asset to reflect inflation. The CII for the year 2013-14 is . 939. Assuming a conservative 7% inflation for the next two years, CII will be . 1,005 for 2014-15 and . 1,075 for 2015-16. When the FMP is redeemed in April 2015, you can also take into account the CII of 2015-2016. This is because even though you have held your investment only for 375 days, you get the benefit of CII number for three years. So, the final value of your investment is . 1,14,483 (. 1 lakh multiplied by CII at the time of sale (. 1,075) and divide it by CII at the time of purchase (. 939).


Now, the capital gains after providing for double indexation turns out to a capital loss of . 4,983 (. 1,09,500 minus . 1,14,483), which makes your tax liability nil. In fact, you can even carry forward this loss for eight years and set it off against long term capital gain.

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