My parents have some Rs. 4 lakhs which they need it in liquid format sooner or later. They are considering Bank FD as an option but I am thinking of some safe debt fund which can beat the FD returns. What do you guys suggest? Are there any safe funds in which money can be parked for better returns than FD? How are the returns post tax?
May I ask if your parents are senior citizens? i.e. Age >= 60
If so, then FD is a better option. Let me tell you how.
If they put 4 Lakhs in FD, the SBI bank rates are 7.3% p.a. for senior citizens currently. Moreover, the FD interest earned up to Rs 50,000 would be tax exempted under section 80TTB. So which means the interest earned on Rs 4 Lakh, approx 29.2k after a year would be completely tax-free which can be reinvested in another FD and so on.
Also, if you do an online FD means it is high liquidity. Even at midnight you can log in to net-banking, break the FD and get instant fund in the savings a/c.
How is it better for taxation purpose? Please explain.
For FD I mentioned under section 80TTB a senior citizen gets exemption upto Rs 50,000 interest amount. No TDS deducted as well.
Even if Ultra Short Fund gives you 8% return, for 4 Lakh amount it would be Rs 32k STCG which would be taxed. Are you considering that the senior citizen does not have any income? So upto 3 Lakh (including all income sources) there would be no tax. Is it so?
Typically Ultra short term funds tend to give you 8.5 to 9.5 percent returns in a five years tenure. The maximum FD rates for senior citizen is 6.85 percent (SBI), 7.55 percent (Axis Bank) and up to Rs. 50000/- of interest in a financial year is exempted from tax but that’s it. So even a senior citizen comes under 20 percent tax bracket (A very hypothetical assumption) the resultant return still would be around 7 percent (I have considered 8.5 percent return in Ultra short term fund) with much more flexibility in liquidity.
Then go with Ultra Short Bonds as the capital gain would be tax exempted having no other income. Total up to Rs 2.5 basic tax exemption would apply. Form 15G would be required and IT Nil Returns to be filed.
As your parents are older people, I would think of some safe investment. Security of funds is needed more than actual returns, as they might need these funds at some point in the future. So, in your case I would go with FDs