Fixed Deposit

OR

Fixed Maturity Plans

Which one offers better benefits?

Fixed Deposits (FDs) and Fixed Maturity Plans (FMPs) are two popular fixed investment avenues. Confused over which one gives you better returns? Let’s look at how the two differ from each other.

Meaning

FDs are deposits in bank debt instruments, while FMPs invest mainly in debt instruments handled by a fund manager.

Lock-in period

FMPs are also known as closed-ended debt-based schemes as they have a lock-in period of at least 3 years. No lock-in period exists in FDs.

Premature withdrawal

FDs allow premature withdrawals without a penalty. Since FMPs have a lock-in period, they cannot be withdrawn prematurely.

Returns

FDs offer assured returns, and while the returns on FMPs aren’t fixed or assured, they generally give better returns, this is why FMPs comes with risk.

Post-tax returns

FMPs give better returns as compared to FDs.

Taxation

Interest earned on FDs is fully taxable; it is added to the income and taxed as per the tax slab.

Ratings

Investors can check their ratings, before investing in FMPs. Credit agencies give FMPs ratings based on performance, such as A, A+, AAA etc. For FDs, investments are made based on the trustworthiness of the bank.

Tenure

For FMPs, the tenure can be anything from a month to more than five years. If you want to lock in your investments for a specific period, FMPs are an ideal option.

Dividend or Growth

Returns from FMPs depend on whether investors choose the dividend option or the growth option:

• Dividend option: Distribution tax is applicable, plus tax rate as per their tax slab.

• Growth option: They fall into one of two categories:

• Short-Term Capital Gains (STCG) – Applicable if investors sell FMPs within three years of holding and the rate is as per the tax slab.

• Long-Term Capital Gains (LTCG) – Applicable if investors hold FMPs for three years or more and flat 20% LTCG is applicable.

Note: Investors can take indexation benefit while calculating LTCG.