In India, fixed deposits (FDs) are among the most well-known instruments for conservative investors, but do you know about liquid mutual funds that invest in fixed-income instruments to generate returns comparable to FDs?
According to Value Research, liquid funds are debt mutual funds that invest in money market instruments with maturities of up to 91 days.
Unlike fixed deposits, which guarantee a fixed rate of return for the chosen tenure, liquid funds do not guarantee a fixed rate because returns are derived from interest generated on underlying instruments like treasury bills, certificates of deposit, commercial paper, and similar instruments issued by banks, corporates, and the government.
Liquid funds have historically produced returns that are similar to FDs, but their tax treatment is different. Do you know which instrument will produce superior post-tax returns for different tax brackets?
Best FDs in 2026
| Small finance banks | Highest interest rate slab in % | Tenure | 1-year returns in % | 3-year returns in % | 5-year returns in % | 10-year returns in % |
| AU Small Finance Bank | 7.40 | 30 months 1 day to 36 months | 6.35 | 7.40 | 6.75 | 6.75 |
| Equitas Small Finance Bank | 8.00 | 3 years 1 day (Maxima FD) | 7.10 | 7.10 | 7.00 | 7.00 |
| ESAF Small Finance Bank | 8.00 | 800 Days | 6.00 | 6.00 | 5.75 | 5.75 |
| Jana Small Finance Bank | 8.00 | Above 2 years to 3 years | 7.00 | 8.00 | 7.77 | 6.50 |
| Shivalik Small Finance Bank | 8.00 | 23 months 1 day to 27 months | 6.00 | 7.50 | 6.25 | 6.25 |
| slice Small Finance Bank | 7.75 | 18 Months 1 day to 2 years | 6.25 | 7.50 | 7.00 | 6.50 |
| Suryoday Small Finance Bank | 8.25 | 5 years | 7.25 | 7.25 | 8.25 | 7.25 |
| Ujjivan Small Finance Bank | 7.80 | 2 years | 7.25 | 7.25 | 7.20 | 6.50 |
| Utkarsh Small Finance Bank | 8.10 | 666 days | 6.00 | 7.50 | 7.00 | 6.75 |
| Private sector banks | Highest interest rate slab in % | Tenure | 1-year returns in % | 3-year returns in % | 5-year returns in % | 10-year returns in % |
| Axis Bank | 6.50 | 18 months to 10 years | 6.25 | 6.50 | 6.50 | 6.50 |
| Bandhan Bank | 7.45 | 2 years to less than 3 years | 7.00 | 7.25 | 5.85 | 5.85 |
| City Union Bank | 7.25 | 555 days | 6.65 | 6.50 | 6.55 | 6.25 |
| CSB Bank | 7.10 | 18 months | 5.00 | 5.75 | 5.75 | 5.75 |
| DBS Bank | 6.85 | 376 days to 400 days | 6.30 | 6.40 | 6.25 | 6.25 |
| DCB Bank | 7.50 | 24 months to less than 25 months; 34 months to less than 35 months; 60 months to 61 months | 6.90 | 7.00 | 7.50 | 7.00 |
| Federal Bank | 6.70 | 48 months | 6.25 | 6.50 | 6.40 | 6.40 |
| HDFC Bank | 6.50 | 3 years 1 day to less than 4 years 7 months | 6.25 | 6.45 | 6.40 | 6.15 |
| ICICI Bank | 6.50 | 3 years 1 day to 10 years | 6.25 | 6.45 | 6.50 | 6.50 |
| IDFC FIRST Bank | 7.25 | 500 days to 3 years | 6.50 | 7.25 | 6.75 | 6.00 |
| IndusInd Bank | 7.00 | 2 years to 3 years | 6.75 | 7.00 | 6.65 | 6.50 |
| Jammu & Kashmir Bank | 7.05 | 888 days | 6.55 | 6.80 | 6.85 | 6.85 |
| IDBI Bank | 6.50 | Above 2 years to less than 3 years | 6.20 | 6.35 | 6.25 | 5.90 |
| Karnataka Bank | 7.00 | 555 days | 6.50 | 6.15 | 6.15 | 5.50 |
| Kotak Mahindra Bank | 6.80 | 2 years to less than 3 years | 6.35 | 6.40 | 6.25 | 6.25 |
| RBL Bank | 7.20 | 18 months to 3 years | 7.00 | 7.20 | 6.70 | 6.70 |
| SBM Bank India | 7.65 | Above 2 years 3 days to 3 years 2 days | 7.10 | 7.65 | 7.00 | 7.00 |
| South Indian Bank | 6.80 | 30 months | 6.25 | 6.20 | 5.70 | 5.70 |
| Tamilnad Mercantile Bank | 7.25 | 567 days (TMB 567) | 6.80 | 6.70 | 6.70 | 6.70 |
| YES Bank | 7.25 | 18 months 1 day to less than 24 months | 6.65 | 7.00 | 6.75 | 6.75 |
| Public sector banks | Highest interest rate slab in % | Tenure | 1-year returns in % | 3-year returns in % | 5-year returns in % | 10-year returns in % |
| Bank of Baroda | 6.75 | 555 days – BoB Golden Goal Deposit Scheme | 6.25 | 6.25 | 6.30 | 6.00 |
| Bank of India | 6.85 | 999 days | 6.50 | 6.70 | 6.00 | 6.00 |
| Bank of Maharashtra | 6.65 | 400 days | 6.40 | 5.25 | 5.00 | 5.00 |
| Canara Bank | 6.60 | 555 days | 6.25 | 6.25 | 6.25 | 6.25 |
| Central Bank of India | 6.75 | 444 days | 6.10 | 6.00 | 6.00 | 6.00 |
| Indian Bank | 6.65 | 555 days | 6.10 | 6.05 | 6.00 | 6.00 |
| Indian Overseas Bank | 6.60 | 444 days | 6.50 | 6.10 | 6.10 | 6.10 |
| Punjab National Bank | 6.60 | 444 days | 6.25 | 6.30 | 6.35 | 6.00 |
| Punjab & Sind Bank | 6.85 | 666 days | 5.85 | 5.85 | 5.95 | 5.85 |
| State Bank of India | 6.45 | 444 days – Amrit Vrishti | 6.25 | 6.30 | 6.05 | 6.05 |
| Union Bank of India | 6.55 | 555 days | 6.20 | 6.10 | 6.00 | 6.00 |
Source: Paisabazaar. Data as of 19th August 2026
Top-10 performing liquid funds
Best liquid funds in 1-year
| Funds | 1-year returns in % |
| ABSL Liquid Dir | 6.53 |
| Axis Liquid Dir | 6.53 |
| Sundaram Liquid Dir | 6.53 |
| JioBlackRock Liquid Dir | 6.52 |
| DSP Liquid Dir | 6.50 |
| Edelweiss Liquid Dir | 6.50 |
| Franklin India Liquid Super Inst Plan Dir | 6.50 |
| Nippon India Liquid Dir | 6.49 |
| PGIM India Liquid Dir | 6.49 |
| UTI Liquid Dir | 6.48 |
Source: Value Research as of 26th August 2026
Best liquid funds in 3-year
| Funds | 3-year returns in % |
| ABSL Liquid Dir | 7.02 |
| Axis Liquid Dir | 7.02 |
| Edelweiss Liquid Dir | 7.02 |
| Sundaram Liquid Dir | 7.01 |
| DSP Liquid Dir | 7 |
| Franklin India Liquid Super Inst Plan Dir | 7 |
| Groww Liquid Dir | 6.99 |
| Mahindra Manulife Liquid Dir | 6.99 |
| Nippon India Liquid Dir | 6.99 |
| PGIM India Liquid Dir | 6.99 |
Source: Value Research as of 26th August 2026
Best liquid funds in 5-years
| Funds | 5-year returns in % |
| ABSL Liquid Dir | 6.37 |
| Axis Liquid Dir | 6.36 |
| Edelweiss Liquid Dir | 6.35 |
| Sundaram Liquid Dir | 6.35 |
| Mahindra Manulife Liquid Dir | 6.35 |
| PGIM India Liquid Dir | 6.34 |
| Bank of India Liquid Dir | 6.34 |
| Union Liquid Dir | 6.34 |
| DSP Liquid Dir | 6.33 |
| Franklin India Liquid Super Inst Plan Dir | 6.33 |
Source: Value Research as of 26th August 2026
Best liquid funds in 10-years
| Funds | 10-year returns in % |
| Quant Liquid Dir | 6.35 |
| Mahindra Manulife Liquid Dir | 6.2 |
| ABSL Liquid Dir | 6.18 |
| Franklin India Liquid Super Inst Plan Dir | 6.18 |
| Axis Liquid Dir | 6.17 |
| PGIM India Liquid Dir | 6.17 |
| Edelweiss Liquid Dir | 6.16 |
| Nippon India Liquid Dir | 6.16 |
| Baroda BNP Paribas Liquid Dir | 6.15 |
| UTI Liquid Dir | 6.14 |
Source: Value Research as of 26th August 2026
How are liquid mutual funds and fixed deposits taxed?
Liquid Funds are a type of debt Mutual Fund (MF) known for their high liquidity and low-risk profile. These funds invest in short-term money market instruments, such as Treasury Bills (T-Bills), Commercial Papers, and Certificates of Deposit (CDs) with varying maturities ranging from a few days to a few months.
Gains from liquid funds are taxed at applicable slab rates for individual taxpayers as short-term capital gains, irrespective of the period of holding.
Interest earned on an FD is taxed under the head “Income from Other Sources”. The interest is added to the total income and taxed at the applicable slab rate for individual taxpayers.
| Particulars | Liquid Mutual Fund | Bank FD |
| Nature | Market-linked debt mutual fund | Bank deposit |
| Tenure | Flexible | Fixed |
| Risk & Return | Potentially higher, not guaranteed | Fixed and guaranteed. Premature withdrawal may attract a penalty in the form of reduced interest |
| Liquidity | Liquid asset | Lock-in period applicable |
| Taxation | Short-term gain taxed at slab rate (for post-Apr 2023 investments) | Interest taxed at slab rate annually/accrual basis. Deduction for FDR of more than 5 years in a Scheduled Bank |
| TDS | No TDS on redemption gains | TDS applicable if interest exceeds threshold. The threshold for senior citizens is Rs.1 Lac as against Rs.50,000 for regular individuals. A specified form can be filed with the bank for non-deduction of TDS if the estimated total income of the individual is below the taxable limit. |
Note: The Finance Act, 2023 introduced a special provision for debt mutual funds (including liquid funds) as per which the entire capital gain is treated as Short-Term Capital Gain (STCG) and taxed at the income-tax slab rate. For units Purchased Before 1 April 2023, a grandfathering provision applies to these investments and will be taxed as long-term capital gain at a special rate of 12.5% (without indexation) if the holding period exceeds 24 months if sold on or after 23 July 2024.
Which offers better post-tax returns?
The returns from both instruments are taxable at applicable slab rates; however, in the case of liquid funds, the expenses incurred in connection with transfer are eligible for deduction while computing income.
“The tax rates for both the instruments are the same; however, Liquid funds may be tax efficient from a cash flow perspective because tax is generally triggered when units are redeemed, whereas FD interest is taxable as it accrues and is reported annually,” said Riaz Thingna, Partner, Grant Thornton Bharat.
Under the new tax regime (which is the default regime), the slab rates are the same irrespective of the type of individual, whether men or women, senior or non-senior. However, in the case of the old regime, the slab rates differ: Rs 2.5 Lacs, Rs 3 lakhs, and Rs 5 Lacs for non-senior, senior, and super senior citizens, respectively.
Below is the illustration according to Thingna (as per different slab rates)
Assumptions
Resident individual aged 35 years
Investment: Rs 10,00,000
Holding period: 1 year
FD rate: 7.0%
Liquid fund return: 7.2%
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | – |
| Tax @ 5% slab | Rs 3,500 | Rs 3,600 |
| Post-tax return | Rs 66,500 | Rs 68,400 |
| Effective post-tax yield on investment | 6.65% | 6.84% |
10% Slab
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | – |
| Tax @ 10% slab | Rs 7,000 | Rs 7,200 |
| Post-tax return | Rs 63,000 | Rs 64,800 |
| Effective post-tax yield on investment | 6.3% | 6.48% |
15% Slab
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | – |
| Tax @ 15% slab | Rs 10,500 | Rs 10,800 |
| Post-tax return | Rs 59,500 | Rs 61,200 |
| Effective post-tax yield on investment | 5.95% | 6.12% |
20% Slab
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | |
| Tax @ 20% | Rs 14,000 | Rs 14,400 |
| Post-tax return | Rs 56,000 | Rs 57,600 |
| Effective post-tax yield on investment | 5.60% | 5.76% |
25% Slab
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | – |
| Tax @ 25% slab | Rs 17,500 | Rs 18,000 |
| Post-tax return | Rs 52,500 | Rs 54,000 |
| Effective post-tax yield on investment | 5.25% | 5.4% |
30% Slab
| Particulars | FD | Liquid Fund |
| Investment | Rs 10,00,000 | Rs 10,00,000 |
| Pre-tax return | Rs 70,000 | Rs 72,000 |
| TDS @10% u/s 194A on FD | Rs 7,000 | |
| Tax @ 30% | Rs 21,000 | Rs 21,600 |
| Post-tax return | Rs 49,000 | Rs 50,400 |
| Effective post-tax yield on investment | 4.90% | 5.04% |
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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