New Delhi: Whether you pay higher or lower tax on liquid funds or fixed deposits, it depends on your investment amount, capital gains made, interest earned and the investment horizon. It is based on these parameters, that Liquid Funds vs FD taxation benefits depend.

Liquid funds taxation

Liquid Funds short term capital gains tax is levied according to the Income Tax slab of the investor. There is no liquid fund short term capital gains tax rate as such fixed by the government. The STCG tax rate depends on which tax slab is applicable to the investor. Liquid fund short term investment tenure is considered of less than three years for taxation purpose. While, no such STCG tax is levied on fixed deposits.

LTCG tax rate on liquid funds

LTCG tax rate on liquid funds of 20 per cent is levied. Duration of long term capital gains tax on liquid funds is three years or more. While, no LTCG tax is levied on fixed deposits.

So, whether investment is to be made for short term or long term, one would be required to pay lower tax in FDs or liquid funds, this will depend on the investment amount, the interest earned on FDs and the capital gains made on redemption of the liquid funds.

Liquid Funds vs FD taxation!

Liquid funds vs FD taxation benefits under Section 80c

Investor does not get any income tax deduction benefits under section 80c of the Income Tax Act, 1961, on investments made in liquid funds even in the long term.

FD deduction in income tax

Fixed deposits of five years tenure provide income tax benefits of up to Rs 1.50 lakh under Section 80c. The account holder’s taxable income will be reduced by an amount equivalent to that invested in 5 year FDs.

TDS on FD Interest

TDS will be deducted at the rate of 10 per cent on interest earned in excess of Rs 40,000 per year on  tax saving 5 year FDs. TDS is levied by the bank itself upfront. The tax payer doesn’t need to pay any taxes.

TDS on liquid funds

While, TDS on liquid funds is levied at the rate of 10 per cent on dividends received in excess of Rs 5,000. So, same TDS is levied on lower amount of dividend earned in liquid funds. While, same 10 per cent is levied on higher amount in case of term deposits. So, from TDS perspective, fixed deposits are better. However, in case of time deposits, TDS is implied on interest while, in case of liquid funds, it is levied on dividends and not on capitals gains made.