After demonetisation, the bank accounts of nearly all Indians are bulging with cash. Given the restrictions on withdrawals, a large chunk of this money is going to stay put in bank accounts for the next few months and earn a paltry 4% (6% in select banks) interest per year. Though the interest on the savings bank account is tax free up to Rs 10,000 per year, it’s not a good idea to keep Rs 2.5 lakh idling in your bank account.
The easiest way to deploy your bank balance is to open a fixed deposit, though the returns may not be very exciting. Banks have cut deposit rates. Also, the interest earned on fixed deposits is fully taxable at the normal rate applicable to the investor. In the highest tax bracket (annual taxable income of over Rs 10 lakh), the post-tax return is less than 5%.
A better option is to put this money in short-term debt funds. If you are a mutual fund investor and have fulfilled the KYC requirements, you can invest online. Shortterm debt funds can deliver up to 7-8% returns in a year. The big benefit is that unlike fixed deposits, the income from mutual funds is treated as capital gains and taxed at a lower rate if the investment is held for at least three years. They are also more flexible. You can withdraw small amounts whenever required or invest more when you have surplus cash. Most mutual fund houses offer online investment facilities and the entire process does not take more than 30-40 minutes.
Debt funds usually take one day to transfer money to the investor’s bank account. But some funds even offer instant liquidity. The Reliance Money Manager Fund and DSP BlackRock Money Manager Fund, both ultra-short term schemes, allow investors to withdraw a portion of their money at any time by placing a redemption request either through the website, mobile app or by sending an SMS. The money is credited to investor’s bank account instantaneously. Investors can redeem up to 95% of the amount in their account, subject to a maximum of Rs 2 lakh per day.
Though debt funds give more than fixed deposits and the savings bank account, the gains still get taxed at the same rate if the investment is for less than three years. You can avoid by opting for arbitrage funds. These funds invest in stocks and equity instruments but don’t carry the market risk. Like stocks and equity funds, the gains are taxed at 15% if redeemed within one year. After one year, the gains are tax free. Check the exit load of the arbitrage fund before you invest, otherwise the penalty of 0.5-1% can pare your returns.