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All About Liquid Funds Taxation

Want to know how liquid funds are taxed in India? Read this blog to find out! Understand how short term and long term capital gains are calculated for liquid funds.
April 4, 2024

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A tax rate applies to the capital gains that you earn from any mutual fund, including liquid funds. It’s important to understand the tax that you’ll have to pay on redeeming your liquid fund investment. 

In fact, knowing the liquid funds’ tax rate for your salary slab can help you save tax. This blog will walk you through liquid mutual funds taxation and how it varies based on the holding period.     

Breaking Down Liquid Funds Taxation

First things first, liquid funds are a type of debt fund. They invest in debt securities like bonds, commercial paper, T-bills, and more, which mature in 60-91 days. That’s why they’re taxed just like debt funds. 

Capital gains earned after withdrawing an investment are taxed in India. This simply means that if you stay invested in liquid funds, you won’t have to pay a tax on the profit you’ve earned. 

But let’s say you’ve withdrawn your liquid fund investment. Then, the liquid mutual funds’ taxation rate varies based on the holding period or “term”. This is broken down into two types for liquid fund tax calculation.

How Does Liquid Fund Tax Calculation Work?

There are two types of liquid funds tax rates that you need to know about. The first is known as a short term capital gains tax. It’s applicable if you’ve redeemed your liquid fund investment in less than 3 years.

Short term capital gains tax is calculated by adding the profits you’ve earned from the liquid fund to your income. You’ll then be taxed based on the I-T slab that you fall under. 

The second one is called a long term capital gains tax, which is applicable for liquid fund investments redeemed after 3 years. It has a flat tax rate of 20%. But wait, there’s more. 

Liquid funds redeemed after 3 years carry an indexation benefit, where the price at which you bought the liquid fund is adjusted for inflation based on the index issued by the Government of India. 

Liquid Funds Tax Rate At A Glance

To summarize, liquid funds are not tax-free and carry short term and long term capital gains tax that’s applicable when you redeem your investment. Here’s the latest liquid funds tax rate.

Tax Type

Tax Rate

Short Term Capital Gains

I-T Slab

Long Term Capital Gains

20% (with indexation)

Want to know more about saving tax of up to ₹46,800? Read this blog

Which Liquid Funds Are Best?

Want to know the best liquid funds in India? Here's a sneak peek of the best liquid funds currently being recommended on Cube!

1. Nippon India Liquid Fund

This liquid fund has been known to generate better returns than the average bank savings account. Nippon India Liquid Fund is a part of the Cube ATM feature that lets you withdraw your investment in seconds.

  • AUM: ₹21,655 crores
  • 1-year returns: 3.15%
  • 3-year returns: 5.43%
  • 5-year returns: 6.02%
  • Expense ratio: 0.32%

2. SBI Liquid Fund

This liquid fund has been active since 2003 and has generated relatively better returns than the average bank savings account. 

  • AUM: ₹58,305 crores
  • 1-year returns: 3.17%
  • 3-year returns: 5.31%
  • 5-year returns: 5.91%
  • Expense ratio: 0.26%

3. HDFC Liquid Fund

This liquid fund has been on the market since 2000 and has generated approximately 6.93% returns since its inception.

  • AUM: ₹45,347 crores
  • 1-year returns: 3.10%
  • 3-year returns: 5.27%
  • 5-year returns: 5.87%
  • Expense ratio: 0.30%

For the rest, check out this blog on the top 10 best liquid funds in India

FAQs

1. Are liquid funds tax-free?

Liquid funds are not tax-free. They carry a tax for short term and long term capital gains. An investment held for less than 3 years is liable for short term capital gains and is taxed based on the investor’s I-T slab. Liquid funds redeemed after 3 years carry a long term capital gains tax at a rate of 20% with indexation benefits. 

2. What is the liquid funds’ tax rate?

The tax rate for liquid funds is calculated based on the holding period, which is known as short term and long term. Short term capital gains are taxed according to the investor’s tax slab and long term capital gains are taxed at 20% with indexation benefits.  

3. What is the current rate of dividend distribution tax (DDT) on liquid funds in India?

Ans. As of my knowledge cutoff date in September 2021, the DDT rate on liquid funds was 29.12% (including a 12% surcharge and 4% Health and Education Cess). Tax rates may change, so it's advisable to check the latest DDT rates with the government authorities.

4. How can I calculate the tax liability for my liquid fund investments in India?

Ans. Tax liability can be calculated by determining the capital gains on your liquid fund investments, applying the appropriate tax rate based on the holding period, and considering any indexation benefit for long-term gains.

Note:

Facts & figures are true as of 22-10-2021. All information mentioned is for educational purposes and relies on publicly available information. None of the information shared here is to be construed as investment advice. We strongly recommend you consult a Cube Wealth coach before investing your money in any stock, mutual fund. PMS or alternative asset.

Conclusion

In conclusion, understanding the taxation of liquid funds is crucial for investors to make informed decisions regarding their short-term investments. Liquid funds offer the potential for modest returns with high liquidity, making them a popular choice for parking surplus funds and achieving financial goals. However, the tax treatment of these funds can impact the overall returns and should be factored into investment decisions.

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Priya Bansal
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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