Similarity between FMP and FD
The basic similarity between FMPs and FDs is that both these investment instruments have definite maturity periods. It means that the investor's money is tied up in both of these investment options for a fixed period of time.
FDs have varying tenures ranging from days to months to 10 years. Similarly, FMPs are also offered with maturity periods ranging from months to years.
Another similarity between them is that FMPs and FDs are debt based schemes and they do not have any equity component in them.
Where do they differ?
The fundamental difference between both these instruments is that fixed maturity plans offer expected returns whereas fixed deposits offers guaranteed returns to the investor. It means that in case of fixed maturity plans investors are only provided with an assumed figure of returns. In case of fixed deposits, the exact amount of returns can be calculated beforehand.
It is because of this fundamental difference that fixed maturity plans are considered marginally riskier than FDs.
In terms of tax benefits, FMPs fare better than FDs. In fact, to some extent the reason of their popularity can be attributed to the fact that they offer better post tax returns.
The interest earned on bank FDs is taxable as per Section 56 of the Income Tax Act. Taxes are levied on it at the highest rate of the tax slab in which an individual falls. On the other hand, returns on FMPs are either taxed under Dividend Distribution Tax or Capital Gains tax rate. For the investors paying taxes in higher tax slabs, the taxation rates of both Dividend Distribution Tax and Capital Gains tax are lower as compared to relevant tax rates applicable on FDs.
For example, for an FMP of maturity greater than a year, earning an indicative yield of 10.3 percent, the yield after tax deductions would be 9.3 percent. On the other hand, for fixed deposits with pre-tax earnings of 10.3 percent, the total post tax benefit comes out to be 7.3 percent.