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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Caselet: Mr. Rao, aged 35 and in the 30% tax bracket, has Rs 1,00,000 to invest for one year in an instrument that will be taxed on interest at his slab rate (ignore cess and surcharge). Option A is a bank FD paying 8% p.a., taxed at slab. Option B is a tax-free bond paying 6.4% p.a., with interest exempt. Which option gives the higher post-tax return, and what is the post-tax return of the FD?

Option B is better. The FD earns Rs 8,000, of which 30% tax of Rs 2,400 is deducted, leaving Rs 5,600, a post-tax return of 5.6%. The tax-free bond yields 6.4% with no tax, so it gives the higher post-tax return.

  1. AOption A, post-tax 5.6%
  2. BOption B, as the FD post-tax return is 5.6%Correct
  3. COption B, as the FD post-tax return is 6.0%
  4. DOption A, as the FD post-tax return is 8.0%

Explanation

FD interest = Rs 8,000; tax at 30% = Rs 2,400; post-tax = Rs 5,600, i.e. 5.6%. The tax-free bond gives 6.4% with no tax, which is higher. Check: 6.4% / (1-0.30) = 9.14% pre-tax equivalent, above 8%. Option A is wrong because 5.6% is less than 6.4%.

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