FMPs preferable to FDs for people in highest tax bracket

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SummaryThe sum assured in motor insurance is determined keeping in view the principle of indemnity, i.e., the claim amount should not exceed the loss amount.

I want to renew my motor insurance. Why is it that the insured declared value of my car differs from insurer to insurer? How do I compute the IDV myself?

Ajay Sharma

The sum assured in motor insurance is determined keeping in view the principle of indemnity, i.e., the claim amount should not exceed the loss amount. The insured declared value (IDV) is the maximum sum assured fixed by the insured, which is basically the current market value of the vehicle. In case of a new vehicle, it is the selling price, excluding registration and insurance. In case of a used vehicle, the IDV is arrived after deducting depreciation.

The depreciation rates increases from 5% to 50% from six months to five years, depending on the age of the vehicle. For vehicle of more than five years, the IDV is decided by mutual agreement between the insured and the insurer or assessed by the surveyor/dealer. It is highly recommended that the IDV is nearer the market value. If it is higher, then the claim will be restricted to the market price less depreciation. If it is lower, then the claim will be lower than the actual loss. However, the lower the IDV, the lower will be the premium.

I have bank FDs worth R10 lakh. I get interest of R1 lakh out of which 10% TDS is deducted. Do I have to show the interest of R90,000 in my income from other sources, which will then attract another 30% tax as I am in that bracket?

Arvind Jaiswal

As you are in the 30% tax bracket, the tax liability on the interest earned will be 30% plus 3% cess. TDS is the tax deducted in advance, which is adjusted against the tax liability. In your case, your total tax liability on interest will be R30,900 out of which you have already paid R10,000 through TDS.

So, your remaining tax liability is R20,900.The net yield post tax is 6.91% and even if you reinvest the maturity proceeds, the tax is payable only on the interest portion in the future.

Which is a better investment option — FDs or FMPs? What is the tax structure for both products?

Govind Rao

In case of fixed deposits, the tax liability is computed as per the tax bracket. For fixed maturity plans, the tax liability is 10% (without indexation) and 20% (with indexation). For an assesee at in higher tax brackets, FMP

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