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

Mr. Iyer, a resident individual in the 30% slab, is choosing between a bank FD earning 7% p.a. and a tax-free bond yielding 5.6% p.a., where the interest on the bond is fully exempt. Ignoring cess and surcharge, what is the post-tax yield comparison?

The FD yields 7% x 0.70 = 4.9% after tax at the 30% slab, while the tax-free bond keeps its full 5.6% because the interest is exempt. The bond is therefore better for Mr. Iyer; its taxable-equivalent yield is 8%.

  1. AFD post-tax 4.9%, tax-free bond 5.6%; bond is betterCorrect
  2. BFD post-tax 7%, tax-free bond 5.6%; FD is better
  3. CFD post-tax 4.9%, tax-free bond 3.92%; FD is better
  4. DFD post-tax 5.6%, tax-free bond 5.6%; both are equal

Explanation

FD post-tax yield = 7% x (1 - 0.30) = 4.9%. Tax-free bond interest is exempt, so its yield stays 5.6%. Check: the pre-tax equivalent of 5.6% is 5.6/0.7 = 8%, which is above 7%, so the bond is better.

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