Most Indian households should target 6 months of essential expenses as an emergency fund. Increase to 9–12 months if you’re self-employed, have irregular income, or multiple dependents. Park it across a 3-bucket mix—cash/UPI, savings + sweep FD, and liquid/overnight mutual funds (T+1 liquidity; some offer instant access up to ₹50,000 or 90% of folio). Keep bank balances within ₹5 lakh per bank to stay fully under DICGC insurance. (AMFI India, Securities and Exchange Board of India, amc.ppfas.com, Reserve Bank of India)
Why an Emergency Fund Matters
An emergency fund is a ring-fenced cash buffer for job loss, hospitalisation, large repairs, or other unexpected shocks. It protects long-term goals (like retirement or your child’s education) from forced redemptions or high-cost borrowing.
This guide explains how much to keep, where to park it, tax & safety rules, and India-specific best practices.
How Much Should You Keep?
Rule of thumb by profile
| Profile | Job/Income Stability | Recommended Size |
|---|---|---|
| Salaried (stable employer) | High | 6 months of essential expenses |
| Salaried (cyclical industry/1 income) | Medium | 6–9 months |
| Self-employed/freelancer/business owner | Low/variable | 9–12 months |
| Retired (drawdown from corpus) | Depends on pension/annuity | 12 months (often prudent) |
| Families with dependents/special needs | Higher risk | 9–12 months |
Essential expenses = rent/EMI, groceries, utilities, insurance premiums, school fees, transport, medical costs—not travel/shopping.
Formula (simple and actionable)
Emergency Fund Target = Monthly Essential Expenses × Target Months
- If your essentials are ₹75,000/month and you’re self-employed targeting 10 months:
₹75,000 × 10 = ₹7.5 lakh
How to Calculate Your Number (in 10 minutes)
- List essentials: Add rent/EMIs, premiums, basics (2 minutes).
- Add buffers: 5–10% for medical co-pays & inflation (1 minute).
- Pick target months from the table above (1 minute).
- Compute the total with the formula (1 minute).
- Decide allocation across the 3 buckets below (5 minutes).
Where Should You Park the Emergency Fund?
The 3-Bucket Structure (liquidity first, yield second)
Bucket 1 — “Immediate” (1 month of expenses):
- Cash + UPI-ready savings account.
- Keep within ₹5 lakh per bank to stay covered by DICGC insurance. If larger, spread across banks or use joint/second holder capacities. (Reserve Bank of India)
Bucket 2 — “Near-term” (2–3 months):
- High-interest savings and sweep/auto-FDs (short tenors).
- Easy access while earning a bit more than a plain savings account.
Bucket 3 — “Next-line” (3–8 months):
- Liquid or Overnight Mutual Funds.
- Typical redemption is T+1 working day. (AMFI India)
- Many AMCs offer Instant Access Facility (IAF)—up to ₹50,000 or 90% of the folio value (whichever lower) credited instantly to bank. Check your fund’s features before relying on it. (Securities and Exchange Board of India, amc.ppfas.com)
Why not long FDs or market-linked products? They can lock in your money or add volatility—not ideal for emergencies.
Tax & Safety Essentials (India-specific)
- Bank safety: Deposits are insured by DICGC up to ₹5,00,000 per depositor per bank (principal + interest). Splitting across banks helps keep every rupee insured. (Reserve Bank of India)
- Debt/liquid fund taxation: For units acquired on/after 1 April 2023, most debt-oriented funds (≤35% domestic equity) are treated as “specified mutual funds”; gains are taxed as short-term at slab rates, removing earlier indexation benefits. Plan your bucket-3 size with this in mind. (AMFI India)
- Savings interest deduction:
- Section 80TTA: up to ₹10,000 deduction on savings account interest for individuals/HUFs (non-seniors).
- Section 80TTB: senior citizens can claim up to ₹50,000 on interest from savings/FD/RD at banks & post offices. (Income Tax India)
A Smart Allocation Template (illustrative)
Goal: ₹6,00,000 emergency fund (for a salaried household with ₹1,00,000 essentials × 6 months)
- Bucket 1 (₹1,00,000 | ~17%) — Instant cash/UPI savings.
- Bucket 2 (₹1,50,000 | 25%) — Savings + sweep FD (7–90 days).
- Bucket 3 (₹3,50,000 | ~58%) — 2–3 liquid/overnight funds across different AMCs to diversify operations risk; enable IAF where available. (AMFI India, Securities and Exchange Board of India)
Triggers to Revisit Your Emergency Fund
Review every 6–12 months or when these occur:
- Job change, business volatility, or income drop.
- New EMI or a big life event (child, dependent parent).
- Health insurance change or premium jump.
- Inflation pushing monthly essentials higher.
Common Mistakes to Avoid
- Chasing returns with volatile products (equity, long-duration debt) in your emergency pool.
- Keeping it all in one bank above DICGC limits. (Reserve Bank of India)
- Ignoring T+1 timelines for liquid funds; assume instant only if your fund offers IAF (and know its cap). (AMFI India, amc.ppfas.com)
- Forgetting taxes on savings interest and debt-fund redemptions. (Income Tax India, AMFI India)
Case Studies (India-centric)
1) Dual-income salaried couple (no dependents):
Essentials ₹70,000/month → 6 months = ₹4.2 lakh.
- Bucket 1: ₹70k; Bucket 2: ₹1.2 lakh; Bucket 3: ₹2.3 lakh (two liquid funds; IAF enabled).
2) Self-employed with two dependents:
Essentials ₹1,20,000/month; variable cash flows → 10 months = ₹12 lakh.
- Bucket 1: ₹1.2 lakh; Bucket 2: ₹3 lakh; Bucket 3: ₹7.8 lakh across three AMCs.
- Keep each bank balance ≤₹5 lakh; use two banks for coverage. (Reserve Bank of India)
3) Retiree drawing from corpus:
Essentials ₹60,000/month → 12 months = ₹7.2 lakh.
- Keep 3 months cash/savings; rest split between sweep FDs and overnight funds for lower duration risk.
FAQ (for featured snippets)
Q1. Is 3 months enough?
For stable salaried roles with strong family backstops, 3–6 months may work. Many Indian households prefer 6 months for comfort.
Q2. Are liquid funds safe for emergencies?
They invest in high-quality, short-term instruments and typically redeem T+1; some offer instant access up to ₹50k/90% folio. They are not capital-guaranteed or insured like bank deposits; diversify across AMCs. (AMFI India, amc.ppfas.com)
Q3. Should I keep it all in one bank?
Avoid exceeding ₹5 lakh per bank to stay fully insured; split across banks if needed. (Reserve Bank of India)
Q4. What’s the tax on this money?
Savings interest may get 80TTA/80TTB deductions; sweep FD interest is fully taxable. Debt/liquid fund gains for post-Apr 1, 2023 units of specified mutual funds are taxed at slab (no indexation). (Income Tax India, AMFI India)
Related Reading on Endovia Wealth
- Liquid Funds for Parking Surplus Capital
- How to Create a Personal Financial Plan
- How are Mutual Funds Taxed?
- Direct vs Regular Mutual Funds
Bottom Line
Your emergency fund is insurance for your goals. Pick a target (6–12 months), compute it with today’s expenses, and place it where you can actually access it, not where it merely earns the highest yield. Revisit annually and after life changes to keep your buffer real and ready.
Citations: AMFI on liquid fund redemption (T+1) (AMFI India); SEBI Master Circular (IAF framework) and AMC guidance on IAF cap (₹50k/90% folio) (Securities and Exchange Board of India, amc.ppfas.com); RBI/DICGC deposit insurance limit (₹5 lakh) (Reserve Bank of India); Income-tax FAQs on 80TTA/80TTB (Income Tax India); AMFI tax corner on Section 50AA (debt funds ≤35% equity taxed at slab for units acquired on/after Apr 1, 2023) (AMFI India).