FIXED MATURITY PLAN (FMP)

These are schemes with a fixed maturity date i.e., they run for a fixed period of time. “This
period could range from 15 days to as long as two years or more. Like in an FD, when the
period comes to an end, the scheme matures, and your money is paid back to you,” Most
FMPs being launched these days have a maturity period or tenure ranging from a little over a
month to a little over a year. "There are FMPs for one month (up to 35 days), three months
(up to 100 days), six months, one year (367-370 days), two years and three years — most
common are one month, three months and one-year tenure “The returns on a three-month
FMP are at around 7.25-7.5% per year whereas the returns on a one-year FMP are around 8-
8.5%," says the head of fixed income of a mutual fund who declined to be named. This was
confirmed by another head of fixed income of a mutual fund and a couple of financial
advisors. It was standard practice among mutual funds to give out indicative returns on FMPs
before investors invested. They managed to do this because an FMP which matures in 370
days invests in financial securities maturing in the same time period. This gave mutual funds a
fair idea about the returns on offer. Depending on the return the securities maturing in one
year were giving, the FMP gave an indicative yield to the mutual fund distributors..Most one-
year FDs offer a return of around 6.5-7% to ordinary depositors and 7.5% to senior citizens
(people over 60). Meanwhile, one-year FMPs offer a return of around 8-8.5%. So, at a very
basic level, FMP returns are higher. Once we take into account the tax treatment for the gains
made on both FDs and FMPs, the net return earned on an FMP is much better. “What gives
FMPs the edge is the greater tax efficiency they offer. In other words, on a tax-adjusted basis,
the return on an FMP is higher than that of a bank FD.” The entire interest earned on an FD is
taxable, depending on the tax bracket you fall in. For those falling in the 30.9% highest tax
bracket, the real return from a one-year fixed deposit paying an interest of 7% is around
4.84%. However, the return on an FMP is categorised as a capital gain. So, for a period of
more than one year, an FMP is taxable at the rate of 10% without indexation or 20% with
indexation, whichever is lower. For instance, an individual invests Rs 50,000 in an FMP. The
rate of inflation is 5% and the return on the FMP after 370 days is around 8%. This means that
the investor gets Rs 54,000 at maturity, which implies a gain of Rs 4,000. This gain taxed at the
rate of 10% would mean a tax payment of Rs 400 and a net gain of Rs 3,600 which would
imply a return of 7.2%. If we take indexation into account, the cost after inflation goes up to Rs
52,500 (Rs 50,000 + 5% of Rs 50,000). So, the capital gain in this case is Rs 1,500 (Rs 54,000 –
Rs 52,500). And a 20% tax on this works out to Rs 300, which is lower than the Rs 400 tax that
needs to be paid without indexation. So, the net gain is actually Rs 3,700 (Rs 4,000 – Rs 300),
or 7.38% (Rs 3,700 expressed as a percentage of Rs 50,000). Now compare this to 4.84%
return you earn in case of a fixed deposit, it tells you very clearly where more money is to be
made.“The tax benefit due to indexation and the fact that interest on bank FDs is fully taxed
makes FMPs a good bet.”Most one-year FDs offer a return of around 6.5-7% to ordinary
depositors and 7.5% to senior citizens (people over 60). Meanwhile, one-year FMPs offer a
return of around 8-8.5%. So, at a very basic level, FMP returns are higher. Once we take into
account the tax treatment for the gains made on both FDs and FMPs, the net return earned on
an FMP is much better. “What gives FMPs the edge is the greater tax efficiency they offer. In
other words, on a tax-adjusted basis, the return on an FMP is higher than that of a bank FD.”
The entire interest earned on an FD is taxable, depending on the tax bracket you fall in. For
those falling in the 30.9% highest tax bracket, the real return from a one-year fixed deposit
paying an interest of 7% is around 4.84%.
However, the return on an FMP is categorised as a capital gain. So, for a period of more than
one year, an FMP is taxable at the rate of 10% without indexation or 20% with indexation,
whichever is lower. For instance, an individual invests Rs 50,000 in an FMP. The rate of
inflation is 5% and the return on the FMP after 370 days is around 8%. This means that the
investor gets Rs 54,000 at maturity, which implies a gain of Rs 4,000. This gain taxed at the
rate of 10% would mean a tax payment of Rs 400 and a net gain of Rs 3,600 which would
imply a return of 7.2%. If we take indexation into account, the cost after inflation goes up to Rs
52,500 (Rs 50,000 + 5% of Rs 50,000). So, the capital gain in this case is Rs 1,500 (Rs 54,000 –
Rs 52,500). And a 20% tax on this works out to Rs 300, which is lower than the Rs 400 tax that
needs to be paid without indexation. So, the net gain is actually Rs 3,700 (Rs 4,000 – Rs 300),
or 7.38% (Rs 3,700 expressed as a percentage of Rs 50,000). Now compare this to 4.84%
return you earn in case of a fixed deposit, it tells you very clearly where more money is to be
made. The tax benefit due to indexation and the fact that interest on bank FDs is fully taxed
makes FMPs a good bet.”

Source—Economic Times
Rating scale for Long-Term Instruments

AAA Instruments rated 'AAA' are judged to offer the highest degree of

(Triple A)  safety, with regard to timely payment of financial obligations. Any
Highest Safety adverse changes in circumstances are most unlikely to affect the
payments on the instrument.

AA Instruments rated 'AA' are judged to offer a high degree of safety,

(Double A)  with regard to timely payment of financial obligations. They differ
High Safety only marginally in safety from 'AAA' issues.

A Instruments rated 'A' are judged to offer an adequate degree of

Adequate Safety safety, with regard to timely payment of financial obligations.
However, changes in circumstances can adversely affect such issues
more than those in the higher rating categories.

BBB  Instruments rated 'BBB' are judged to offer moderate safety, with

(Triple B)  regard to timely payment of financial obligations for the present;
Moderate Safety however, changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than for
instruments in higher rating categories.

BB Instruments rated 'BB' are judged to carry inadequate safety, with

(Double B)  regard to timely payment of financial obligations; they are less
Inadequate Safety likely to default in the immediate future than instruments in lower
rating categories, but an adverse change in circumstances could
lead to inadequate capacity to make payment on financial
obligations.

B Instruments rated 'B' are judged to have high likelihood of default;

High Risk while currently financial obligations are met, adverse business or
economic conditions would lead to lack of ability or willingness to
pay interest or principal.

C Instruments rated 'C' are judged to have factors present that make

Substantial Risk them vulnerable to default; timely payment of financial obligations
is possible only if favourable circumstances continue.
D Instruments rated 'D' are in default or are expected to default on
Default scheduled payment dates. 

NM Instruments rated 'NM' have factors present in them, which render

Not Meaningful the outstanding rating meaningless. These include reorganisation
or liquidation of the issuer, the obligation being under dispute in a
court of law or before a statutory authority.

Note: 1) CRISIL may apply '+' (plus) or '-' (minus) signs for ratings from
'AA' to 'C' to reflect comparative standing within the category. 

2) CRISIL may assign rating outlooks for ratings from 'AAA' to 'B'.
Ratings on Rating Watch will not carry outlooks. A rating outlook
indicates the direction in which a rating may move over a medium-
term horizon of one to two years. A rating outlook can be 'Positive',
'Stable', or 'Negative'. A 'Positive' or 'Negative' rating outlook is
not necessarily a precursor of a rating change. 

3) The contents within parenthesis are a guide to the pronunciation

of the rating symbols. 

4) A suffix of 'r' indicates investments carrying non-credit risk.

The 'r' suffix indicates that payments on the rated instrument have
significant risks other than credit risk. The terms of the instrument
specify that the payments to investors will not be fixed, and could
be linked to one or more external variables such as commodity
prices, equity indices, or foreign exchange rates. This could result in
variability in payments-including possible material loss of principal-
because of adverse movement in value of the external variables.
The risk of such adverse movement in price/value is not addressed
by the rating. 

5) A suffix of '(so)' indicates instruments with structured obligation.

A CRISIL rating on a structured obligation reflects CRISIL's opinion

on the degree of credit protection provided by the credit
 enhancement structure. 

The assessment takes into consideration any arrangement for

payment on the instrument by an entity other than the issuer to
fulfill the financial obligations on the instrument. It also takes into
account any other means of enhancing the credit quality of the
rated obligation. 

6) CRISIL assigns ratings to preference shares on its long-term

rating scale. For the purpose of these ratings, preference dividend
payments are construed as being equivalent to interest payments,
and failure to pay the same on time is treated as a default.

Rating Scale for Short-Term Instruments

P1 This rating indicates that the degree of safety regarding

timely payment on the instrument is very strong.

P2 This rating indicates that the degree of safety regarding

timely payment on the instrument is strong; however,
the relative degree of safety is lower than that for
instruments rated 'P1'.

P3 This rating indicates that the degree of safety regarding

timely payment on the instrument is adequate;
however, the instrument is more vulnerable to the
adverse effects of changing circumstances than an
instrument rated in the two higher categories.

P4 This rating indicates that the degree of safety regarding

timely payment on the instrument is minimal, and it is
likely to be adversely affected by short-term adversity or
less favourable conditions.

P5 This rating indicates that the instrument is expected to

be in default on maturity or is in default.

NM  Instruments rated 'NM' have factors present in them,

Not Meaningful which render the rating outstanding meaningless. These
include reorganisation or liquidation of the issuer, the
obligation being under dispute in a court of law or
before a statutory authority.

Note: 1) CRISIL may apply '+' (plus) sign for ratings from 'P1' to
'P4' to reflect a comparatively higher standing within the
category. 

2) A suffix of 'r' indicates investments carrying non-

credit risk.

The 'r' suffix indicates that payments on the rated

instrument have significant risks other than credit risk.
The terms of the instrument specify that the payments
to investors will not be fixed, and could be linked to one
or more external variables such as commodity prices,
equity indices, or foreign exchange rates. This could
result in variability in payments, including possible
material loss of principal, because of adverse
movements in value of the external variables. The risk of
such adverse movements in price/value is not addressed
by the rating.

3) A suffix of '(so)' indicates instruments with structured

obligation.

A CRISIL rating on a structured obligation reflects

CRISIL's opinion on the degree of credit protection
provided by the credit enhancement structure. 

The assessment takes into consideration any

arrangement for payment on the instrument by an
entity other than the issuer to fulfill the financial
obligations on the instrument. It also takes into account
any other means of enhancing the credit quality of the
 rated obligation.

Rating Scale For Fixed Deposits

FAAA 
This rating indicates that the degree of safety regarding
("F Triple A") 
timely payment of interest and principal is very strong.
Highest Safety

FAA  This rating indicates that the degree of safety regarding

("F Double A")  timely payment of interest and principal is strong.
High Safety  However, the relative degree of safety is not as high as
for fixed deposits with 'FAAA' ratings.

FA  This rating indicates that the degree of safety regarding

Adequate Safety timely payment of interest and principal is satisfactory.
Changes in circumstances can affect such issues more
than those in the higher rated categories.

FB  This rating indicates inadequate safety of timely

Inadequate payment of interest and principal. Such issues are less
Safety susceptible to default than fixed deposits rated below
this category, but the uncertainties that the issuer faces
could lead to inadequate capacity to make timely
interest and principal payments.

FC  This rating indicates that the degree of safety regarding

High Risk timely payment of interest and principal is doubtful.
Such issues have factors present that make them
vulnerable to default; adverse business or economic
conditions would lead to lack of ability or willingness to
pay interest or principal.

FD  This rating indicates that the fixed deposits are either in
Default default or are expected to be in default upon maturity.

NM  Instruments rated 'NM' have factors present in them,

Not Meaningful which render the outstanding rating meaningless. These
include reorganisation or liquidation of the issuer, and
 the obligation being under dispute in a court of law or
before a statutory authority.

Note: 1) CRISIL may apply '+' (plus) or '-' (minus) signs for
ratings from FAA to FC to indicate the relative position
within the rating category.

2) CRISIL may assign rating outlooks for the ratings from

'FAAA' to 'FB'. Ratings on Rating Watch will not carry
outlooks. A rating outlook indicates the direction in
which a rating may move over a medium-term horizon
of one to two years. A rating outlook can be 'Positive',
'Stable', or 'Negative'. A 'Positive' or 'Negative' rating
outlook is not necessarily a precursor of a rating change.

3) The contents within parenthesis are a guide to the

pronunciation of the rating symbols.

Corporate Credit Rating Scale:

CCR AAA  A 'CCR AAA' rating indicates Highest degree of strength

("CCR Triple A") with regard to honoring debt obligations.

CCR AA A 'CCR AA' rating indicates High degree of strength with

("CCR Double A") regard to honoring debt obligations.

A 'CCR A' rating indicates Adequate degree of strength

CCR A
with regard to honoring debt obligations.

A 'CCR BBB' rating indicates Moderate degree of

CCR BBB
strength with regard to honoring debt obligations.

A 'CCR BB' rating indicates Inadequate degree of

CCR BB
strength with regard to honoring debt obligations.

A 'CCR B' rating indicates High Risk and greater

CCR B
susceptibility with regard to honoring debt obligations.
 A 'CCR C' rating indicates Substantial Risk with regard to
CCR C
honoring debt obligations.

A 'CCR D' rating indicates that the entity is in Default of

CCR D
some or all of its debt obligations.

A 'CCR SD' rating indicates that the entity has Selectively

Defaulted on a specific issue or class of debt obligations,
CCR SD
but will continue to meet its payment obligations on
other issues or classes of debt obligations.

CRISIL may apply '+' (plus) or '-' (minus) modifiers for

Note: ratings from 'CCR AA' to'CCR C'  to reflect comparative
standing within the category.

TAX CALCULATED
Example
Example 1: Mrs. Kuldeep is 35 year old and earning 8 lac annually. (Male)

Calculation
Tax on Income up to 1,60,000 Nil
Tax on Income between 1,60,000-5,00,000 (@ 10%) 34,000
Tax on Income between 5,00,000-8,00,000 (@ 20%) 60,000
Total 94,000
Educational Cess(@ 3% of Total Tax) 2,820
Net Tax Payable 96,820

Example 2: Mrs. Harminder Kaur is 32 year old and earning 12 lac annually. (Female)

Calculation
Tax on Income up to 1,90,000 Nil
Tax on Income between 1,90,000-5,00,000 (@ 10%) 31,000
Tax on Income between 5,00,000-8,00,000 (@ 20%) 60,000
Tax on Income between 8,00,000- 12,00,000 (@30%) 1,20,000
Total 2,11,000
Educational Cess(@ 3% of Total Tax) 6,330
Net Tax Payable 2,17,330

Example 3: Mrs. Rajesh is 67 years old and earning 8 lac annually. (Senior Citizen)

Calculation
Tax on Income up to 2,40,000 Nil
Tax on Income between 2,40,000-5,00,000 (@ 10%) 26,000
Tax on Income between 5,00,000-8,00,000 (@ 20%) 60,000
Total 86,000
Educational Cess(@ 3% of Total Tax) 2,580
Net Tax Payable 88,580

800000*12=9600000

160000---exempt

160000---500000= 340000@10%= 34000

500000---800000=300000@20%= 60000

800000---960000=880000@30%= 264000

358000