Why doesn't the money in your current account earn anything?
In India, a current account pays no interest. Because it pays no interest, the useful question for a business is how your company can earn on its spare cash instead of leaving it idle.
A current account is designed for one job well. It handles the movement of money. It is the place where client payments and sales arrive every day. It is also the place from which salaries, rent, vendor bills, GST, TDS and advance tax depart.
Between the time money arrives and the time it is needed for a payment, it often sits for weeks or even months. For a business that collects revenue before it pays its expenses, such as a school or a consultancy paid at the end of a project, this gap can be long. While the money waits in the current account, its value to the company does not grow.
To earn anything on that cash, it has to move out of the account into a place where it can work.
What is the cost of leaving cash in the bank?
Keeping spare cash in a bank account means it earns nothing while waiting for bills to fall due. This is a common habit because companies want their money to be ready on the day a payment is needed.
A company usually knows its payment dates well in advance. Salaries fall on the same day every month. Rent is predictable. Tax deadlines for GST and TDS are fixed by law. Advance tax falls on four specific dates in the year.
Because these dates are known, a company can see how long its cash will be idle. If a sum of money is not needed for thirty days, leaving it in a current account is a missed opportunity. The money is there and the payment date is clear, but the time in between goes unused.
The usual alternative is a fixed deposit, which has its own strengths as a bank deposit with a fixed rate. However, a fixed deposit requires a company to pick a maturity date months ahead. If a payment falls due before that date, breaking the deposit early usually costs a penalty. This makes it less suited for cash that must stay flexible for regular business payments.
How can your company's cash earn while it waits for payments?
Spare cash can move out of the current account into liquid mutual funds. In a liquid fund, the money can earn while it waits and then come back to the bank when a payment is due.
Several features make this a fit for business cash:
- Flexibility. Your company can take out part of the money or all of it at any time. There is no maturity date to pick in advance.
- Speed. The money comes back within three business days, usually sooner.
- Control. The units stay in your company's own name. The approvers your board names sign off every movement.
A liquid fund is different from a bank deposit, and these differences are important for a director to consider. It is not backed by a bank guarantee and its value can move. Also, taking money out within the first few days after moving it in can carry a small charge.
The way these gains are taxed is another point of difference. While interest on a fixed deposit is taxed every year as it builds up, gains from a liquid fund are taxed only when the units are sold. The tax rate is the same as the company's normal rate, so the difference is the timing of the payment rather than the amount.
For money that has a job to do next month but no job to do today, moving it out of the current account can make the company's cash work harder. Whether this fits your company's needs is a decision for your board.
How Idlewise helps
Idlewise helps companies earn on every idle rupee. Your money stays in your own account, and it is back in the bank before every payment. It is ready for your auditors.
Idlewise is offered by Sigfyn Financial Services Private Limited, an AMFI-registered mutual fund distributor (ARN-254976).
Request a walkthrough to see how it works for your company.
Idlewise is offered by Sigfyn Financial Services Private Limited, an AMFI-registered mutual fund distributor (ARN-254976). Sigfyn distributes mutual funds; it does not provide investment advice. Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not indicative of future returns.