NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories
Caselet: Mr. Iyer, in the 30% tax bracket (ignore surcharge and cess for simplicity), is comparing a company fixed deposit paying 8.0% p.a. interest, taxable at slab rate, with a debt instrument paying a fully tax-exempt return. What minimum tax-exempt yield would make the exempt instrument at least equal to the FD on a post-tax basis?
The required tax-exempt yield is 5.6%. The FD's 8.0% interest loses 30% to tax, leaving 5.6% post-tax, so any exempt instrument yielding 5.6% or more matches or beats it for this client under the stated assumptions.
- A5.6%Correct
- B2.4%
- C8.0%
- D11.4%
Explanation
Post-tax FD yield = 8.0% x (1 - 0.30) = 5.6%. A tax-exempt instrument must therefore yield at least 5.6%. 2.4% is the tax amount, 8.0% ignores tax, and 11.4% wrongly grosses up instead of netting down.
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