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

Caselet: Ms. Priya Nair, 40, is in the 30% tax slab (ignore surcharge and cess). She is choosing between a taxable bank FD yielding 7.5% p.a. and a tax-free bond yielding 5.4% p.a. Both are of similar safety and tenure. What is the post-tax yield of the FD and which is better?

The FD's post-tax yield is 7.5% × 0.70 = 5.25%, which is below the tax-free bond's 5.4%. So for a client in the 30% slab, the tax-free bond gives the better after-tax return, assuming similar safety and tenure.

  1. A5.25% on the FD; tax-free bond is betterCorrect
  2. B7.50% on the FD; FD is better
  3. C5.25% on the FD; FD is better
  4. D2.25% on the FD; tax-free bond is better

Explanation

Post-tax FD yield = 7.5% × (1 − 0.30) = 5.25%. The tax-free bond gives 5.4%, which is higher than 5.25%. So the tax-free bond is better on a post-tax basis. Taking 7.5% ignores tax, and 5.25% does not beat 5.4%.

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