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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products

Ms. Kavita Rao, a resident aged 35 in the 30% slab bracket (ignore cess), invests Rs 10,00,000 in a 5-year bank FD at 7% p.a. paid annually. She also considers a tax-free bond yielding 5.2% p.a. with interest fully exempt. What is her post-tax annual income from the FD, and which gives the higher post-tax income on Rs 10,00,000?

The FD pays Rs 70,000 interest, and after 30% tax she keeps Rs 49,000. The tax-free bond at 5.2% gives Rs 52,000 with no tax. So the tax-free bond gives the higher post-tax income by Rs 3,000 a year.

  1. ARs 49,000 from FD; tax-free bond is higher at Rs 52,000Correct
  2. BRs 70,000 from FD; FD is higher
  3. CRs 49,000 from FD; FD is higher than the bond
  4. DRs 52,000 from FD; the two are equal

Explanation

FD interest = 10,00,000 x 7% = Rs 70,000. Tax at 30% = Rs 21,000, so post-tax = Rs 49,000. Tax-free bond gives 10,00,000 x 5.2% = Rs 52,000, which is higher. Taking the FD at Rs 49,000 as higher mixes up the figures.

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