FMP : Confusion about DTC

Fixed Maturity Plans are one clause of Mutual funds which was seen as 'Safe', 'Tax Efficient' Investment option by investors. Thanks to the simple product structure, almost every investor understood and appreciated it. To brush up:

·         Fixed Maturity Plans are those mutual funds which invest in Fixed Interest earning securities.

·         FMP’s differ from other Debt Mutual funds in the sense: The securities invested actually mature on the specified time period and the principal and returns are distributed among investors after deducting the fund management expenses.

·         The advantages of FMP’s are:

o   There is Fixed Tenure of Investment

o   Returns from FMP’s are consistent since there is no speculation involved

o   Dividends distributed are net of Dividend distribution tax (13.7%)

 

Now a new tax proposal under Direct Tax Code seems to be creating some confusion about the taxation of FMP. Let us understand this DTC issue bit deeper.

• Earlier, under Income Tax Act 1961, any asset held for more than one year (365 days) was classified as Long Term Holdings. Accordingly these assets were eligible for Long Term Capital Gain Taxation after indexation benefit.
• But now DTC classifies Assets as Long term, if they are held for more than a year from the end of the financial year when the assets were acquired. For example, if the investments are made in 1st July 2012, it will be considered for indexation benefit, only if it held till March 2014.
• Earlier if the asset is was held till next year 1st July 2013, it was considered as Long term, and hence was eligible for indexation benefit.
• Long Term taxation has been 10% flat or 20% after indexation.
• Short Term taxation is at prevailing tax slab under which the investors income tax account is treated - it could be 10% or 20% or 30%.

Following illustration would make things bit more clear: