For investors and traders who want to keep their idle funds working, Zerodha’s Liquid Bees or Liquid Mutual Funds through Coin offer a smart solution. These instruments are ideal for short-term parking of cash while still earning returns slightly higher than a savings account. However, while the returns may appear small and the risk low, understanding the taxation on these instruments is essential. Taxation on Zerodha liquid case investments such as Liquid Bees, Liquid Mutual Funds, or any liquid fund held through Zerodha is based on how long you hold the investment and the applicable income tax rules. Knowing how your gains are taxed can help you optimize returns and make better investment decisions.
What Is Zerodha Liquid Case?
Zerodha offers a way for clients to park unutilized cash through liquid mutual funds on its Coin platform or through Liquid Bees ETFs (Exchange Traded Funds) in their demat accounts. These funds invest in short-term government securities, treasury bills, or low-risk corporate papers. They offer relatively stable returns and quick redemption, making them attractive to active traders and conservative investors alike.
There are two main types of liquid investment options in Zerodha:
- Liquid Mutual Funds: Purchased through Zerodha Coin, the mutual fund investment platform linked to your Zerodha account.
- Liquid ETFs (like Liquid Bees): Traded on the exchange and held in your demat account, typically used as collateral for margin in trading accounts.
How Returns Are Generated in Liquid Investments
Liquid funds and ETFs don’t provide capital appreciation in the same way as stocks. Instead, they offer small daily gains due to interest accumulation from underlying fixed-income instruments. In the case of Liquid Bees, daily returns are distributed in the form of additional units instead of price appreciation. For mutual funds, the NAV (Net Asset Value) increases gradually with interest income.
This makes the taxation slightly different compared to equities and regular mutual funds, depending on holding period and the method of gain distribution.
Taxation on Zerodha Liquid Bees
Liquid Bees are a type of ETF and are treated as non-equity capital assets for tax purposes. Taxation on the gains depends on how long you hold the units:
1. Short-Term Capital Gains (STCG)
If you sell or redeem Liquid Bees within 36 months (3 years) of purchase, any gains are considered short-term capital gains. These gains are added to your total income and taxed at your applicable income tax slab rate.
2. Long-Term Capital Gains (LTCG)
If you hold Liquid Bees for more than 36 months, the gains qualify as long-term capital gains. LTCG on debt instruments is taxed at 20% with the benefit of indexation, which adjusts the purchase price based on inflation, reducing your taxable gains.
Taxation on Liquid Mutual Funds via Zerodha Coin
Just like Liquid Bees, liquid mutual funds are considered debt mutual funds for taxation. The taxation rules for debt mutual funds have recently changed and are important to understand.
Post-April 2023 Rule Changes
Earlier, debt funds held for more than 36 months received indexation benefits and were taxed at 20% LTCG. However, from April 1, 2023, the Finance Act removed the indexation benefit for many categories of debt mutual funds, including liquid funds. As a result, all gains irrespective of the holding period are now taxed based on the investor’s income tax slab.
This means whether you hold your liquid mutual fund for a day or five years, the gains are added to your total income and taxed at slab rates.
Impact of This Change
This has brought the taxation of mutual fund liquid investments in line with fixed deposits. While it reduces the tax advantage for long-term investors, liquid funds still offer better liquidity and relatively higher yields compared to savings accounts or FDs for short durations.
Dividend vs Growth Option in Liquid Funds
In Zerodha Coin, investors can choose between growth and income (dividend) options in mutual funds. Taxation differs based on this selection:
- Growth Option: Gains are realized only when you redeem, and taxation is based on capital gain rules (now slab-based for liquid funds).
- Income/IDCW Option: Dividends are now taxed in the hands of investors as per their slab rates after the abolition of Dividend Distribution Tax (DDT) in 2020.
Most investors prefer the growth option for its simplicity and compounding benefit. However, if you rely on regular income from liquid fund investments, IDCW may be preferred, with tax implications in mind.
How to Declare and Pay Taxes on Zerodha Liquid Investments
1. Track Capital Gains
Zerodha provides a detailed capital gains statement for investments made via Coin and in the Kite platform. You can download this report during tax season to track your realized gains.
2. File Under the Correct Head
Include short-term gains from liquid funds under Income from Capital Gains in your income tax return. If taxed as slab income, declare it under Income from Other Sources if needed.
3. Include Interest-Like Income
Any returns that appear like interest, such as additional units in Liquid Bees, should be reported accurately based on their market value at the time of redemption or sale.
Advantages Despite Taxation
Even though the tax structure has become less favorable post-2023, liquid funds and ETFs like Liquid Bees still offer several benefits:
- Quick Liquidity: Funds are usually credited the next working day after redemption.
- Low Risk: These funds invest in high-quality, short-duration instruments.
- No Lock-in Period: Unlike FDs or ELSS, there’s no mandatory holding requirement.
- Better Than Idle Cash: You earn more than keeping funds in a savings account.
Tax Planning Tips for Liquid Fund Investors
- Use liquid funds for emergency funds or parking surplus cash for short periods (1 week to 3 months).
- Combine with SIPs or STPs if you plan to move funds gradually to equity mutual funds.
- For high tax slab individuals, time your redemptions strategically or consult a tax advisor.
- Keep detailed records of purchase dates and values to optimize tax filing accuracy.
Zerodha’s liquid case investment options, including Liquid Bees and mutual funds through Coin, provide a smart way to earn passive income from idle funds. However, taxation plays a crucial role in determining net returns. While Liquid Bees offer capital gain tax benefits for long-term holding, mutual funds are now taxed at slab rates regardless of duration. Understanding these rules helps investors choose the best instrument for their goals. Always consider your tax bracket, holding period, and investment horizon to make the most of these low-risk financial tools. With proper tax planning and efficient usage, Zerodha liquid investments can be a valuable part of your financial strategy.