The short answer
For business cash you might need at short notice, a liquid fund is usually the better choice: you can take out exactly what you need, any working day, and pay tax only when you withdraw. For money set aside for a known payment on a known date, such as a quarterly GST payment or advance tax, an FD works well too.
What doesn’t make sense is leaving surplus cash in a current account. It earns nothing.
The cost of doing nothing
Current accounts pay no interest. That’s fine for the money you need to run the business day to day. But many businesses keep far more in their current account than they need, sometimes for months, simply because moving it feels like extra work.
₹50 lakh that sits idle in a current account for a year earns nothing. In a liquid fund, it would typically have earned a return close to short-term interest rates, without being locked away.
Liquid fund or FD: how they compare for a business
| Bank FD | Liquid fund | |
|---|---|---|
| Return | Fixed when you open it | Moves with short-term interest rates |
| Taking out part of the money | Usually means breaking the FD, often with a penalty | Withdraw any amount, any working day, with the rest still invested |
| When tax is paid | On interest, every year, whether or not you withdraw | On gains, only when you withdraw |
| Useful as security with the bank | Yes, for bank guarantees or overdrafts | Less commonly accepted |
| Best for | A known payment on a known date, or margin for bank facilities | Cash you may need at uncertain times |
A simple way to organise business cash
Rather than choosing one or the other, most businesses do best with layers, each matched to when the money will be needed:
- Operating cash, in the current account. Enough for about a month of routine payments: salaries, rent, suppliers.
- The next few months’ needs, in a liquid fund. Money for payments you know are coming but can’t date precisely, plus a cushion for surprises. You can move it back to the current account within a working day.
- Known payments on known dates, in an FD or a liquid fund. GST, advance tax, an annual bonus payout, a loan repayment. If the date is fixed, an FD for that term is simple.
- Money that won’t be needed for a year or more. This is genuine surplus, and may suit a different kind of fund altogether. We explain how we think about this on our page for business owners.
A note on tax
The tax on business investment income depends on how your business is set up. For a proprietorship, it’s taxed at your personal slab rate. For a company, it’s taxed at the company’s rate, which for most companies that have chosen the lower tax rate works out to about 25%.
In both cases, FD interest and liquid fund gains are taxed at the same rate. The difference is timing: with an FD you pay tax on interest every year, while with a liquid fund you pay only when you withdraw, so more of your money keeps working in the meantime.
For surplus that can stay invested for a year or more, arbitrage funds can be more tax-efficient, because they are taxed like equity funds: 20% on gains within a year, and 12.5% on gains above ₹1.25 lakh after a year. That’s lower than both the company rate and the top personal slab. Despite the name, they’re low-risk: they earn the small price difference between the share market and the futures market rather than betting on prices rising.
What we’d usually suggest
- Invest in the business’s name, not your own. Keeping business money in your personal name blurs the line between the two, and creates tax and accounting problems. A company can invest in mutual funds in its own name, with a board resolution and the company’s KYC.
- Stick to plain liquid or overnight funds from well-established fund houses. This is money the business may need at short notice. Don’t chase slightly higher returns in riskier debt funds.
- For larger amounts, spread across two fund houses. It’s a simple way to reduce reliance on any one fund.
- Review the layers every quarter, as your cash-flow cycle changes.
When it’s different
- You need the money back within days, not weeks. Overnight funds invest only in one-day lending and carry even less risk than liquid funds. They suit very short gaps between receiving and paying out money.
- Your bank requires an FD as security. If a bank guarantee or overdraft depends on an FD, keep that FD. Liquid funds are for the surplus beyond it.
- You need instant access. Some liquid funds let individuals withdraw up to ₹50,000 instantly, but this facility generally isn’t available to companies. Plan for the usual next-working-day timing instead.
CurateMyMoney is an AMFI-registered mutual fund distributor (ARN-184811). Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Tax rules mentioned are as applicable at the time of writing and may change; please check the current rules or consult a tax professional before acting.
