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

Meera, a 45-year-old client, wants to invest Rs 10 lakh for 10 years. She compares a bank fixed deposit at 7% p.a. compounded annually, taxed each year at her 30% slab (ignore cess), with a tax-free bond yielding 5.5% p.a. compounded annually. Which statement correctly compares the two on a post-tax basis?

The tax-free bond is better. The fixed deposit interest is taxed at 30%, so its post-tax yield is 7% x 0.70 = 4.9%, which is lower than the tax-free bond's 5.5%. Comparing products across categories must use post-tax returns, not headline rates.

  1. AThe fixed deposit is better because 7% is higher than 5.5%
  2. BThe tax-free bond is better because the post-tax FD yield is 4.9%, below 5.5%Correct
  3. CBoth give the same post-tax return of 5.5%
  4. DThe fixed deposit is better because its post-tax yield is 5.6%

Explanation

Post-tax FD yield = 7% x (1 - 0.30) = 4.9%. The tax-free bond gives 5.5% with no tax, so it is higher by 0.6 percentage points. Option 4 wrongly applies a 20% tax rate (7 x 0.8 = 5.6). Option 1 ignores tax altogether.

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