Hybrid Fund Taxation

Decoding hybrid fund taxation

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Investing your hard-earned money is a bit like driving on a highway. There are tolls you have to pay. Just as you can't use an expressway without paying tax, you can't fully enjoy your investment gains without paying tax on them. Understanding these taxation rules is crucial. In this blog, we will delve into the details of hybrid funds taxation to help you ensure that your investment journey is smooth and hassle-free.

 

Different Types of Hybrid Funds

 

Here's a breakdown of the different types of hybrid funds as categorised by the Securities and Exchange Board of India (SEBI):

 

  1. Conservative hybrid funds:

    Conservative hybrid funds allocate 10% to 25% of their investments to equity and equity-related instruments, with the remaining 75% to 90% invested in debt instruments. These funds prioritise stability by leaning towards debt funds. However, they also concentrate on growth with a small equity exposure.

 

  1. Balanced hybrid funds:

    Balanced hybrid funds maintain a balance between debt and equity investments, with a range of 40% to 60% allocated to stocks and an equivalent percentage allocated to debt instruments. They aim to offer moderate growth while managing risks effectively.

 

  1. Aggressive hybrid funds:

    Aggressive hybrid funds focus on growth by investing 65% to 80% in equity and equity-related instruments. The remaining 20% to 35% is invested in debt instruments to provide stability to the portfolio.

 

  1. Dynamic asset allocation (balanced advantage) funds:

    These funds follow a flexible approach and adjust their portfolio composition based on market conditions. They can allocate anywhere from 0% to 100% to equity and debt and adapt their strategy to optimise returns in changing market scenarios.

 

  1. Multi-asset allocation funds:

    Multi-asset allocation funds diversify investments across at least three asset classes, with a minimum allocation of 10% in each category. These funds aim to enhance portfolio stability and mitigate potential losses by spreading the risk across various assets.

 

  1. Arbitrage funds:

    Arbitrage funds invest at least 65% in stocks and employ arbitrage techniques to generate profits. They capitalise on price differences between markets by simultaneously buying and selling securities.

 

  1. Equity savings funds:

    Equity savings funds combine equity, debt, and derivatives and maintain a minimum investment of 65% in stocks and 10% in debt instruments. These funds generate income through cash-futures arbitrage positions while participating in the growth potential of the equity market.

 

Taxes on different types of Hybrid Funds

 

The taxation on hybrid funds is determined by their asset allocation. All mutual funds are divided into two main groups - equity funds and debt funds for the purpose of taxation. Hybrid funds fall under either category based on whether they predominantly invest in equity or debt.

 

Simply put, if a hybrid fund invests most of its assets in equity-related instruments, it is taxed like an equity fund. On the other hand, if the fund's major investments are in debt instruments, it is taxed like a debt fund.

 

  • Equity-oriented hybrid funds:

    Hybrid mutual funds that hold at least 65% of their assets in equity and equity-oriented assets are classified as equity funds. Long-Term Capital Gain (LTCG) tax is applicable to equity fund gains from investments held for more than one year. Gains exceeding Rs 1 lakh per year are taxed at a rate of 10%. On the other hand, the Short-Term Capital Gain (STCG) tax is levied at a rate of 15% on profits made on investments held for less than one year.


Arbitrage funds, equity savings funds, and aggressive hybrid funds are some hybrid funds taxed as equity funds.

 

  • Debt-oriented hybrid funds: 

    Hybrid funds that primarily invest in debt securities are taxed like debt funds. The taxation of gains from these funds depends on their equity allocation. Profits from debt funds with 35% or less of their assets in equities are added to your taxable income. These gains are then taxed according to your applicable income tax slab. Earnings from debt funds with more than 35% but less than 65% equity allocation are taxed at a rate of 20% with the benefit of indexation. Indexation adjusts the asset's purchase price against inflation and helps reduce your taxable income.

    Conservative hybrid funds are an example of hybrid funds that are taxed as debt funds.

 

To sum it up

 

Hybrid funds can cater to a range of different financial goals, thanks to their diverse asset allocations. They are suitable for high-risk as well as risk-averse appetites. However, they are taxed differently based on their portfolios. Make sure to pay attention to this aspect, as it can significantly affect your take-home return.  

 

 

 

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.