You may decide to liquidate your investments in case of emergencies, or when you reach your goals. We’ll tell you all about how it can be done easily as well as the tax implications.
The first thing we do during a financial crisis is to liquidate any investments we may have. The ideal time to liquidate an investment is when you reach a goal. However, when liquidating your investments, it is important to look at the costs involved in such liquidation. Costs include penalties and taxation. If the costs are too high, it is best to look at alternative ways to raise the cash. Here we explore some of the most popular investments and the costs involved when you liquidate them.
Fixed Deposit
Fixed Deposits are considered to be one of the most liquid investments. Generally, banks charge about 0.5% to 1% interest penalty for breakage of an FD. Also, interest will be payable only for the tenure that the FD was with the bank and not for the original tenure booked. For instance, if you invested in an FD for a period of one year at the rate of 8.5% per annum, but you decide to break the FD within 6 months, only the rate applicable for 6 months will be provided and the penalty will also become applicable.
Currently, the rate applicable for 6 months is 6%, and if the penalty is 1%, the interest that you will receive on the FD will be only 5%. Also, remember that tax will be applicable on the interest as per your tax slab. The smart way would be to take a loan against your FD. Typically, banks charge 1% over the interest you are earning on the FD. So, for a 9% FD, the loan rate for a loan against an FD will be just 10%. And the best part is you can continue to earn interest on your FD. Note that most banks provide loans up to 90% of your FD balance.
Additional Reading: Should You Break That Fixed Deposit?
Public Provident Fund (PPF)
Under certain circumstances, you can close your PPF account after the completion of 5 years. These special circumstances include medical expenses and higher education of self and children. However, you can prematurely withdraw from your PPF account from the fifth year onwards. The amount you can withdraw is limited to 50% of your account balance as of the year before you make the withdrawal or 50% of the balance that was in your account in the fourth year after the year of opening. Only the lower of these two balances will be considered for withdrawal purposes.
If you don’t want to make a withdrawal, you can consider a loan against your PPF account. This is available from the third year after the opening of the account. However, you can avail of this facility only up to the point when your account completes six years. These loans also come at a cheaper rate when compared to Personal Loans. The interest rate for a PPF loan is 2% over and above the rate of interest you earn on your PPF. Currently, the interest rate for PPF is 7.9%, therefore the loan rate will be 9.9%.
Additional Reading: 7 Things You Should Know About PPF
Mutual Funds
You can withdraw from an open-ended equity fund at any time. However, keep in mind that short-term capital gains of 15% will become applicable if you withdraw before your investment completes one year. In case you want to withdraw from a Debt Mutual Fund, both short-term capital gains, as well as long-term capital taxes will be applicable. If you sell your Debt Mutual Fund before the completion of 3 years, you need to pay short-term capital gains tax as per the income slab you fall into. Long-term capital gains will be taxed at a rate of 20% with indexation.
Additional Reading: Debt Mutual Fund VS Fixed Deposit
Stocks
You can freely sell your stocks with no penalties or taxes if your investment has completed a year and the gains are less than Rs.1 lakh. If not, you will need to pay short-term capital gains tax at the rate of 15% and long term capital gains of 10%.
Additional Reading: Know When To Sell Your Stocks
There are some investments where premature withdrawal or closure isn’t possible. These include the National Savings Certificate (NSC), tax-saving FD, Equity Linked Savings Schemes (ELSS) of Mutual Funds and the National Pension Scheme (NPS). In case, you need cash and have no investments to encash, consider a Personal Loan. But only if you can afford the interest rate. Carefully check the premature closure and repayment charges before availing a Loan.