I am a 62-year-old investor with moderate risk tolerance and a large portfolio of stocks and equity mutual funds. I also invested ₹30 lakh in HDFC, Axis, and ICICI Prudential asset management companies’ liquid funds in April 2023. Since the capital gains on these funds are taxed at slab rates, I wish to replace these with funds that are less risky and more tax-efficient, and give reasonable returns. Please suggest some appropriate funds and let me know if I should invest lump sums or through a systematic investment plan (SIP).
– Name with-held on request
Your investment of ₹30 lakh in liquid funds was a safe choice. However, since capital gains from these funds are taxed as per your income slab, you may want to explore more tax-efficient options with reasonable returns and low risk.
Latest taxation changes
Earlier, capital gains from liquid funds were taxed as per individual slab rates. However, after Budget 2025, income from debt instruments qualifies for a rebate under Section 87A, making total income up to ₹12 lakh tax-free. If your income including gains from investments exceeds this limit, you will be taxed as per your income tax slab.
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Arbitrage funds: A tax-friendly alternative
Arbitrage funds are a great alternative to liquid funds because they are taxed as equity investments. These funds earn from the price difference between the cash and futures market, making them low-risk compared to equity investments.
Here are the tax benefits.
Long-term capital cains (LTCG): Gains above ₹1.25 lakh are taxed at 12.5% if held for more than a year.
Short-term capital gains (STCG): Gains are taxed at 20% if redeemed within a year.
Also read: You can now gift securities online. Here’s how.
You can expect returns of 6-8% a year from arbitrage funds, which makes them a suitable option for investors in higher tax brackets. However, be mindful that while liquid funds typically allow withdrawals in a day (T+1), arbitrage fund redemptions take two days (T+2) to process.
Other ways to reduce tax on investments
You can also reduce your tax burden by:
- Investing in your spouse’s or other family members’ names, especially if they are in a lower tax bracket.
- Creating a Hindu Undivided Family (HUF) account, which is treated as a separate taxable entity and can help lower overall tax liability.
Final thoughts
If you are looking for a safer, tax-friendly investment, arbitrage funds are a great alternative to liquid funds. However, if your taxable income remains below ₹12 lakh, staying invested in liquid funds could still be a good option. Proper tax planning, including investing through family members or an HUF, can further enhance your tax efficiency.
By making the right choices, you can ensure stable returns while keeping your tax liability in check.
Rakshith H.D. is a certified financial planner and head of digital sales at GoalTeller.
