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

Caselet: Mr. Rohan Mehta, aged 45, is in the 30% tax bracket (ignore surcharge and cess). He is comparing a tax-free bond yielding 6.4% per annum with a taxable bank deposit yielding 8% per annum, interest fully taxable at slab rate. Which is the correct conclusion?

The deposit's post-tax yield is 8% multiplied by 0.70, which equals 5.6%. The tax-free bond gives 6.4% with no tax deducted, so the tax-free bond is the better choice for this client in the 30% bracket.

  1. AThe taxable deposit gives a post-tax yield of 5.6%, so the tax-free bond is betterCorrect
  2. BThe taxable deposit gives a post-tax yield of 6.4%, so both are equal
  3. CThe taxable deposit gives a post-tax yield of 2.4%, so the tax-free bond is better
  4. DThe taxable deposit gives a post-tax yield of 7.7%, so the deposit is better

Explanation

Post-tax yield of deposit = 8% x (1 - 0.30) = 5.6%. The tax-free bond gives 6.4% with no tax, which is higher. Option 6.4% would be the pre-tax equivalent figure wrongly used; 2.4% is the tax amount, not the yield.

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