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