When does your company owe tax on the money it earns?
A private limited company pays tax on its fixed deposit (FD) interest at its normal corporate tax rate, and it must pay this tax every year as the interest builds up. This timing of tax payments is the reason many owners look for a different way to manage their spare cash.
In India, a current account pays no interest, so money sitting there earns nothing and attracts no tax. To earn anything, the cash has to move out of the current account. For a business that collects money before it spends it, such as a school or a consultancy, this spare cash can stay in the company for months.
When that money moves into an FD or a liquid mutual fund, the gains become taxable. The important detail for your company is not the rate of the tax, which is usually the same for both, but the year in which the business has to pay it to the government.
Why can an FD create a cash flow gap?
An FD is a bank deposit where the interest rate is fixed when it is opened. It is a familiar choice for businesses that want a bank guarantee for their money. However, an FD asks the company to pick, months or years ahead, the exact day it will need the money back.
Because FD interest is taxed every year as it builds up, the company must pay tax even before the FD matures. This means cash leaves the business to pay the tax department while the interest itself is still locked away in the bank.
If the company needs to access that money earlier to cover a payment or the tax bill itself, breaking the FD usually costs a penalty. This timing can create a gap where the company is paying tax on earnings it has not yet received in its bank account. For a growing business, that cash could often be put to better use in operations while it waits for a future payment date.
How is the timing different for liquid mutual funds?
Spare cash can move out of the current account into liquid mutual funds instead. Here, the company's gains are also taxed at its normal tax rate, but the difference is when that tax is paid.
With a liquid fund, tax is only paid when the units are sold. This means the growth on the company's spare cash can stay in the fund and continue to earn for longer, rather than being reduced by a tax payment every year. There is no requirement to pay tax on the growth while the company continues to hold the units.
This fits the way a company naturally uses its cash. A company can take out part of the money or all of it whenever a payment falls due. The money comes back within three business days, usually sooner. The units stay in the company's own name throughout.
It is important to remember that a liquid fund is not an FD. It is not bank-guaranteed, and its value can move. Taking money out within the first few days after moving it in can also carry a small charge. Whether the timing of the tax makes a liquid fund a better fit for your spare cash than an FD is a decision for your company to make.
How Idlewise helps
If a liquid fund fits your company's spare cash, Idlewise helps you earn on every idle rupee. Your money stays in your own account, and it is back in the bank before every payment.
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.