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

Caselet: Rohan, in the 30% tax bracket (ignore cess and surcharge), has Rs 1,00,000 to invest for one year. Option A is a taxable bank FD paying 8% p.a. interest. Option B is a tax-free bond paying 6% p.a. interest, with interest fully exempt. Which option gives the higher post-tax return, and what is the post-tax return on Option A?

The tax-free bond is better. The FD's 8% interest is taxed at 30%, leaving 5.6% after tax, while the tax-free bond keeps the full 6%. Hence Option B gives the higher post-tax return for this client.

  1. AOption A, 5.6%
  2. BOption B, post-tax FD return 5.6%Correct
  3. COption B, post-tax FD return 6.4%
  4. DOption A, 8%

Explanation

Post-tax FD return = 8% x (1 - 0.30) = 5.6%. The tax-free bond gives 6%, which is higher. Option 6.4% wrongly applies 20% tax, and 8% ignores tax.

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