hello and welcome to fun to money here
we will be discussing the impact
of capital gains tax on uh liquid funds
and uh why this is important because
liquid funds are strongly recommended
people by people like us
for emergencies or emergency funds when
you're building up emergency fund
we recommend that you buy
liquid funds and especially for income
emergencies uh like if you think you're
going to lose a job
or you're making a transition from one
career to the other you're about to set
up a business
you've got irregular income you want to
take a year off
uh for a course or something like that
but all of them
when you're actually making a provision
emergency provision
to replace your income uh that's when
emergency funds are required and we
recommend for income
emergencies you must have liquid funds
so that's why when you wanted to build a
an emergency fund uh liquid funds are
required
and because you want to be using the
liquid funds you need to know that tax
treatment so that you can smartly build
there there are other uh emergencies
which are medical emergencies
uh where there are there are other
options that we recommend now we have
done this discussion about building
emergency funds
the links are given in the description
section here we'll be talking about the
tax treatment
and how it influences or it should
influence
how you should be planning for an
emergency fund how you should be
building for an
emergency fund so that you can use it in
a tax efficient way
so ah that's what we're going to be
discussing we're going to be discussing
the
tax impact of capital gains tax
impact on liquid funds and we'll be
coming up with the details in just a
little while
welcome back welcome to fundamenti we
are discussing capital gains tax
uh on liquid funds and the reason why we
are discussing it is because liquid
funds are
an important component of emergency
funds
as we have mentioned in our discussion
whose links are given below
you need to have adequate insurance and
a good emergency fund you need to plan
out
according to your realities that
once you do that that's when you should
go for
proper growth investments emergency fund
according to us is the first investment
but it's defensive in nature it's trying
to protect you from
all kinds of emergency medical emergency
and income emergency that we talked
about in the introduction
so you can check out that discussion but
that's why
in understanding capital gains tax
treatment
of liquid funds is important so let's
get started let's see how
the impact happens now liquid funds as
we know
are highly liquid
they're low risk because they invest in
such investments investment options
which are very low risk
they're very short tenured so that you
can you it's easily accessible so uh
if if it's obviously uh if you uh are
investing in it uh uh uh the important
thing out there
in terms of when it comes to emergency
funds
is that accessibility and low risk is
more important rather than returns
but when you are actually investing for
income emergency the part where you are
planning for an income emergency
there because the amount is large you
cannot be uh
just be content with any kind of return
that comes in
for instance if you're going to putting
the money in the bank savings account
uh well you then currently will be uh
you know getting somewhere in the
vicinity
somewhere with three and a half to four
percent uh thereabouts
and that is way way below uh the ten
year
uh annual average inflation rate which
is which is in excess of seven percent
so
uh you need to keep a little bit of that
in mind
however uh uh as you said
uh the first uh uh important thing is
not returns but accessibility but here
we're talking about
the larger part which is income
emergency so let's get on
to the tax treatment so the first thing
that
you need to keep in mind is that if you
make if you
you end up using a liquid a liquid fund
within three years of your investment
the units
within three or three years of your
investment then they are
treated as and you make a capital gain
which you
obviously will because these are very
low risk investments
then that it will be taxed at your
income tax
rate or income tax lab uh because it
will be treated as short-term capital
gains and you'll be
short-term capital gains tax and uh that
of course
uh short-term capital gains tax is your
income tax rate so
till three years uh uh this is
your basically what's happening is uh
because
uh somewhere between uh in the recent
past liquid funds have been returning
in a three-year period i would say uh
between five and five and a half to five
point eight percent of good performing
ones so what's happening
is you're doing you'll be doing a little
better if you look at the last three
years you'll be doing
better uh than the savings bank account
but uh uh uh you know
what's going to happen is you're going
to be comparable you're going to be
comparable to the fd rate
fixed deposit rate of this particular
tenure so
it's pretty even steven still that point
but the moment it crosses three years
then the whole uh complexion changes why
because then uh beyond three years the
gains are looked upon
or they are seen as they are termed as
long-term capital means
so there are two things that happen as
some of you would be knowing
number one you get inflation indexation
benefits so the cost of buying that unit
is gets enhanced by the proportion
of increase in your inflation index so
if the inflation index has moved from
100 to 110 in over the
past uh in the three years so
in the same proportion the cost of your
units would be enhanced
so the price at which you sell and the
price at which you bought
now the new price which is the enhanced
price the capital gains
for tax purposes would be lesser and on
top of that would be
twenty percent uh long term capital
means tax
so what is happening is compare that
with an fd of a
of that similar of the uh tenure which
is a three year plus now
you will find that you are in a better
tax position
right so therefore for an income
emergency provision
when you're buying a liquid fund that is
typically why you would be buying it but
otherwise
you should be going for something else
as we have repeatedly said
so if that is happening then uh
what you need to do is keep in mind that
it's a 3d plus period that you should be
looking at
when you're actually investing in a
liquid fund right so for periods below
that
you should be looking that's basically
you need the money right away
or in a short period it should be
something else
it could be fixed deposit could be
something else what would the other
thing be in uh in mutual funds it could
be
uh uh you could look at an arbitrage
fund you can also look at an admin
transfer
which is taxed as an equity
investment which means below one year
capital gains made
in less than one year tax at 15
uh for more than one year it is taxed
at 10 for the gains above one lakh
rupees still
one until one lakh rupees uh is there no
tax
uh that that is seen as uh
long-term capital gains the canadian
gains that we make under one year
short-term capital gains and the gains
that you make
when you cross one year of holding that
investment
you pay 10 long term capital means tax
so that's something that you can look at
as a supplement for
your emergency fund so uh
these are some of the things that uh you
need to keep in mind
uh remember remember the 10-year
annual average of inflation has been
seven percent
so that's where because you're getting
inflation indexation benefits
uh of uh in
liquid funds like in all red funds uh
therefore
uh it starts coming into play and gives
you a certain advantage
that you should be looking at uh to
take full advantage of so uh this is
roughly uh
uh the play uh that we wanted to convey
to you
do check out our previous discussions on
capital gains tax with its equities or
others and
also in our playlist and also our
discussion on emergency funds
where we have discussed in detail about
all how to build them up and how to
determine the amount
and the strategies and if you like this
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of yourself
till the next presentation wait for us
till the next time
take very good care of yourself and
goodbye