Who Should invest in liquid fund?
- Liquid funds are ideal for investors who want to park their idle cash for a short term and earn decent returns from the same. Since liquid funds offer better returns than many savings accounts.
- The accumulated corpus can be used to fulfill short term needs in the next 4-5 months.
- One can also use Systematic Transfer Plan (STPs) to use the accrued capital in a liquid fund for SIP installment in an equity fund.
How are Liquid Funds Taxed?
Returns from Liquid Funds are taxed based on the holding period of invested capital:
- If you withdraw the amount before three years of investment, Short Term Capital Gains (STCG) Tax as per the income tax slab of the investor. For instance, if an investor gains ₹10,000, via investment in liquid funds, ₹10,000 are added to income tax slab of the investor and taxed accordingly.
- If an investor withdraws the investment including capital gains post 3 years of investment, Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.