Think short-term savings options and most people will start and end their thought with bank term deposits or fixed deposits. For risk-free investment option, the bank fixed deposit is the safest option. However, if one is willing to take a slight risk, returns from debt funds, especially ultra short-term funds are better.
Ultra short-term funds are tax efficient unlike fixed deposits. Typically, the interest earned from a bank fixed deposit is added to one's income and taxed depending on the tax slab one falls in. This way, the returns from bank fixed deposits lose out compared to ultra short-term funds. For instance, at present banks are offering 6-7.25 per cent interest rate per annum on a 91-120 days deposit. In comparison, over the past one year the ultra short-term fund category average has posted 9.24 per cent.
Where these funds score further is the tax efficiency they bring. The dividend option in these funds are taxed at 13.5 per cent including surcharge and cess. However, short-term gains, that is gains on investments of less than a year from these funds are added to one's income but the long-term gains is taxed at 10 per cent without indexation and 20 per cent with indexation. You can choose a good fund from the fund selector tool on our website.
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