Fixed Deposits (FD) and Debt Mutual Funds are two popular investment options in the fixed-income category. They both serve the purpose of providing stable returns with relatively low risk. However, they differ in terms of return potential, liquidity, and taxation.

Fixed Deposits (FD):

FDs are deposits made with banks or financial institutions for a fixed period, ranging from a few months to several years.
They offer a fixed rate of interest, which is usually higher than a savings account but lower than the returns of equity investments.
FDs are considered very safe since they are backed by banks and financial institutions.

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Debt Mutual Funds:

Debt Mutual Funds are investment vehicles that pool investors’ money to invest in fixed-income securities such as corporate bonds, government securities, and other money market instruments.
Returns on Debt Mutual Funds are not fixed, but they usually offer better returns than Fixed Deposits, especially over the long term.
Debt Mutual Funds carry slightly higher risk compared to FDs, as the returns depend on interest rate movements and credit quality of the underlying securities.

Taxation (as of your knowledge cutoff date in September 2021):

Fixed Deposits:

Interest earned on FDs is added to your income and taxed according to your applicable income tax slab.
If the interest earned in a financial year exceeds INR 10,000 (INR 50,000 for senior citizens), the bank deducts TDS (Tax Deducted at Source) at the rate of 10%.

Debt Mutual Funds:

Short-term capital gains (holding period of less than 3 years) are added to your income and taxed according to your applicable income tax slab.
Long-term capital gains (holding period of 3 years or more) are taxed at 20% with indexation benefits, which adjusts the purchase cost for inflation and reduces the taxable gains.

As of my knowledge cutoff date in September 2021, debt mutual funds enjoyed tax benefits compared to fixed deposits, primarily due to the indexation benefit on long-term capital gains. However, tax laws change frequently, and it’s important to consult a financial advisor or review the most recent tax legislation to understand the current tax implications of your investments.

Dr. Vinay Prakash Tiwari
Inventor of LTP Calculator
Founder of Investing Daddy 
Founder of Daddy’s International School

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