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

Mr. Sharma, in the 30% tax bracket (ignore cess and surcharge), is comparing a taxable bank deposit earning 8% per annum with a tax-free bond yielding 5.6% per annum. Which statement is correct?

The two returns are exactly equal. The deposit's 8% interest is taxed at 30%, leaving 5.6% after tax, which matches the tax-free bond's 5.6%. So Mr. Sharma is indifferent on post-tax return alone and should consider liquidity and credit risk.

  1. AThe tax-free bond gives a higher post-tax return than the deposit
  2. BThe two give exactly equal post-tax returnsCorrect
  3. CThe deposit gives a higher post-tax return by 0.4 percentage points
  4. DThe deposit gives a post-tax return of 8% as interest is exempt

Explanation

Post-tax deposit return = 8% x (1 - 0.30) = 5.6%. The tax-free bond yields 5.6% with no tax, so both are equal. Equating them means the tax-equivalent yield of the bond is 8%.

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