Where should I park money for 1 to 3 years: arbitrage fund, liquid fund, or FD?
Last reviewed: 4 November 2026 · Noema Research · 4 min read
Money needed in 1 to 3 years should not ride the stock market, but the choice between arbitrage funds, liquid funds and FDs changes your post tax return more than the headline rate does. Liquid funds and FDs are taxed at your slab rate. Arbitrage funds are taxed as equity: 20% within 12 months, and 12.5% only on gains above ₹1.25 lakh a year after that. On ₹5,00,000 for 24 months in the 30% slab, an arbitrage fund at 7% keeps about ₹72,450 of gain, an FD at 7% about ₹50,715 and a liquid fund at 6.8% about ₹49,218. For under 12 months, or in a low slab, an FD or liquid fund often keeps as much or more. Estimates, not predictions.
Post tax calculator
Compare estimated gains after tax for your amount, horizon and slab.
Example values
Example values
Example values
After tax estimate
Arbitrage
₹72,450 gain after tax
Equity tax: 12.5% only above ₹1.25 lakh after 12 months.
Liquid
₹49,218 gain after tax
Taxed at your slab; redeems in one working day.
FD
₹50,715 gain after tax
Taxed at your slab; TDS may be deducted; early exit penalty.
Estimates, not predictions.
Create an account to save this as a short term goal.
The post tax compare on ₹5 lakh
Rate tables compare headline returns; your slab decides what you keep.
| Horizon | Slab | Arbitrage | Liquid | FD |
|---|---|---|---|---|
| 12 months | 0% | ₹28,000 | ₹34,000 | ₹35,000 |
| 12 months | 20% | ₹28,000 | ₹27,200 | ₹28,000 |
| 12 months | 30% | ₹28,000 | ₹23,800 | ₹24,500 |
| 24 months | 0% | ₹72,450 | ₹70,312 | ₹72,450 |
| 24 months | 20% | ₹72,450 | ₹56,250 | ₹57,960 |
| 24 months | 30% | ₹72,450 | ₹49,218 | ₹50,715 |
| 36 months | 0% | ₹1,12,522 | ₹1,09,093 | ₹1,12,522 |
| 36 months | 20% | ₹1,12,522 | ₹87,275 | ₹90,017 |
| 36 months | 30% | ₹1,12,522 | ₹76,365 | ₹78,765 |
How each option is taxed
| Option | Up to 12 months | More than 12 months |
|---|---|---|
| Arbitrage fund | 20% of gain | 12.5% of gain above ₹1.25 lakh a year |
| Liquid fund | Slab | Slab |
| FD | Slab, TDS 10% above threshold | Slab, TDS 10% above threshold |
At exactly 12 months an arbitrage fund is still short term; the lower rate starts after 12 months.
Match the option to your goal date
The right choice depends first on when you need the money.
For emergency fund sizing, see the emergency fund guide. For a longer lock in, compare PPF and FD; for FD returns after tax, see the inflation comparison.
- Under 12 months: FD or liquid fund. Arbitrage gains are taxed at 20% in this window.
- 12 to 36 months, 20% or 30% slab: an arbitrage fund usually keeps the most after tax.
- 12 to 36 months, low or no slab: an FD keeps about the same with fixed returns.
- Money that may be needed any day: liquid fund.
Liquidity and exit costs
- Liquid funds: redemption in one working day; a small graded exit load applies only within the first 7 days.
- Arbitrage funds: redemption in about two working days; many charge about 0.25% if you exit within 30 days.
- FDs: early withdrawal usually cuts the rate by about 0.5% to 1%.
- Arbitrage returns can fall for some months when market spreads narrow.
Common mistakes
- Comparing headline rates instead of post tax returns.
- Using an arbitrage fund for money needed within 12 months in a high slab without checking the 20% tax.
- Forgetting FD interest is taxed every year even if not withdrawn.
- Parking an emergency fund in a locked FD.
- Putting money needed in 2 years into equity funds.
FAQ
Arbitrage fund or liquid fund for 1 year?+
For 12 months or less, arbitrage gains are taxed at 20% and liquid gains at your slab. In the 30% slab, an arbitrage fund keeps a little more; in the 20% slab or below, a liquid fund or FD keeps the same or more. Estimates, not predictions.
Are arbitrage funds taxed like equity?+
Yes. They hold more than 65% in equity, so gains are taxed at 20% up to 12 months and 12.5% above ₹1.25 lakh a year after 12 months.
How are liquid funds taxed now?+
Units bought on or after 1 Apr 2023 are taxed at your slab rate on the gain, whatever the holding period.
Is my FD covered by deposit insurance?+
Deposits up to ₹5 lakh per depositor per bank, interest included, are insured by DICGC.
Related answers
- How Much Emergency Fund Do You Need in India?
Keep 3 to 12 months of essential spending, not salary. On ₹50,000 of monthly essentials, 6 months is ₹3 lakh, built in 12 months at ₹25,000 a month.
- PPF or FD for low-risk savings?
PPF and FD compared on access, lock-in, tax and predictability, with a worked example in rupees. Estimates, not predictions.
- Do Your FDs and Savings Beat Inflation After Tax?
Interest minus tax minus inflation is your real return. At 6.5% in the 30% slab, an FD trails CPI of 5.54% by about 1% a year. Check yours.
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