What is Fixed Income?

Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until its maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products. Unlike equities that may pay no cash flows to investors, or variable-income securities, where can payments change based on some underlying measure—such as short-term interest rates—the payments of a fixed-income security are known in advance.

Common Fixed Income Instruments

1) Fixed Deposits

A fixed deposit or an FD is an investment instrument that banks and non-banking financial companies (NBFC) offer their customers. Through an FD, people invest a certain sum of money for a fixed period at a predetermined rate of interest in an FD. The rate of interest varies from one financial institution to another, although it is usually higher than the interest offered on savings accounts.

Fixed deposits are available for different periods, ranging from very short-term tenures of 7-14 days to long tenures of 10 years. A fixed deposit is sometimes known as a term deposit.

Taxation

Fixed Deposit interest is taxable at your slab rate along with applicable surcharge/cess.

2) Bonds

When you purchase a stock, you're buying a microscopic stake in the company. It's yours and you get to share in the growth and in the loss. On the other hand, a bond is a type of loan. When a company needs funds for any number of reasons, they may issue a bond to finance that loan. Much like a home mortgage, they ask for a certain amount of money for a fixed period. When that time is up, the company repays the bond in full. During that time the company pays the investor a set amount of interest, called the coupon, on set dates (monthly, quarterly, semi-annually & annually).

There are many types of bonds, including government, corporate, municipal and mortgage bonds. Government bonds are generally the safest, while some corporate bonds are considered the riskiest of the commonly known bond types.

Taxation

The interest earned from Bonds is taxed as per marginal slab rate, and the maximum slab rate is 30 %. Appreciation of the bond price is considered as capital gain and taxed accordingly. If these bonds are held for the long term (more than 12 months for listed bonds and more than 36 months for unlisted bonds), the capital gain tax will be 10 %. Short-term capital gain tax can be 5% to 30%.

Advantages of Fixed Income

• Fixed income investments offer investors a steady stream of income over the life of the bond or debt instrument while simultaneously offering the issuer much-needed access to capital or money.
• The interest payments from fixed-income products can also help investors stabilize the risk-return in their investment portfolio—known as the market risk.
• Should a company declare bankruptcy or liquidation, bondholders have a higher claim on company assets than do common shareholders.