For an investment maturing after March next year, remember the coming tax code differs significantly from the current one.
As the Income Tax Act makes way with effect from April 1, 2012, for the Direct Taxes Code, investors should be careful of overlapping investments. Meaning, investments where the IT Act is applicable while making it, whereas it is the DTC that will apply at the time of maturity.
For example, take the currently popular Fixed Maturity Plans (FMPs) of mutual funds. The attraction of these schemes is the tax efficiency they offer over bank fixed deposits. Both bank FDs and FMPs offer a similar rate of return. While the interest on bank deposits is taxed at the normal rate, in the case of FMPs (over a year), the 10 per cent (20 per cent with indexation) capital gains tax rate applies. Consequently, on a post-tax basis, an FMP is much more advantageous.
However, there is a significant issue. If you were to invest in, say, any one year FMP available currently, the IT Act applies at the time of making the investment. However, at maturity (2012-13), the DTC would apply. And, under the DTC, the tax advantage an FMP has may not be available. Lets understand how and why.