Capital gains taxation of mutual funds depends on how much the fund invests in equity and debt. Since hybrid funds have different equity-debt allocations, the tax treatment of their varies based on their portfolio allocation.
So, let’s find out the taxation of different types of hybrid mutual funds.
What are the different types of hybrid funds?
invest in both equity and debt instruments, offering the growth potential of equities along with the stability of debt instruments. However, the allocation between equity and debt varies across different types of hybrid funds, in line with SEBI regulations.
| Types of hybrid funds | Portfolio composition rule |
| Conservative hybrid fund | 10% to 25% in equity; 75% to 90% in debt |
| Balanced hybrid fund | 40% to 60% in equity; 40% to 60% in debt |
| Aggressive hybrid fund | 65% to 80% in equity; 20% to 35% in debt |
| Dynamic asset allocation fund | Invest dynamically (0% to 100% in equity; 0% to 100% in debt) |
| Multi asset allocation fund | At least 3 asset classes with each having a minimum allocation of 10% |
| Arbitrage fund | 65% in equity; Follows arbitrage strategy |
| Equity savings fund | 65% in equity; 10% in debt; derivatives (minimum specified in scheme information document) |
How capital gains of hybrid funds are taxed?
The capital gains of mutual funds are dependent on how the fund is structured and for how long the investors hold the investments.
Equity-oriented hybrid funds
The equity-oriented hybrid funds invest at least 65% of their assets in equity and related instruments. If you sell the units in less than or equal to 12 months of buying, then (STCG) are taxed at a rate of 20%.
If you sell the units after 12 months of holding, then they are considered long-term capital gains and are taxed at 12.5%. If the long-term capital gains are less than ₹1.25 lakh in a financial year, then no tax will be applicable.
The list of equity-oriented hybrid funds is:
1. Aggressive hybrid fund
2. Arbitrage fund
3. Equity savings fund
Debt-oriented hybrid funds
The debt-oriented hybrid funds invest at least 65% of their assets in debt instruments or no more than 35% in equity instruments. All capital gains from these funds, irrespective of whether they are short-term or long-term, are taxed at the investor’s applicable income tax slab rate.
The pure debt-oriented hybrid funds only include:
1. Conservative hybrid fund
Apart from this, the taxation of balanced hybrid funds, dynamic asset allocation funds, and multi-asset allocation funds is dependent on the respective fund’s structure.
| Type of hybrid fund | Portfolio composition | Capital gains taxation |
| Conservative hybrid fund | 10% to 25% in equity; 75% to 90% in debt | All capital gains, whether short-term or long-term, are taxed at the investor’s applicable income tax slab rate |
| Balanced hybrid fund | 40% to 60% in equity; 40% to 60% in debt | STCG (holding period ≤ 12 months) taxed at the investor’s applicable income tax slab rate LTCG (holding period > 12 months) taxed at 12.5% |
| Aggressive hybrid fund | 65% to 80% in equity; 20% to 35% in debt | STCG (holding period ≤ 12 months) taxed at 20% LTCG (holding period > 12 months) taxed at 12.5% LTCG up to ₹1.25 lakh in a financial year is exempt from tax |
| Dynamic asset allocation fund | Invest dynamically (0% to 100% in equity; 0% to 100% in debt) | Taxation depends on the respective fund’s equity and debt allocation. Funds maintaining equity exposure of at least 65% may qualify for equity taxation. Otherwise, debt taxation may apply. |
| Multi asset allocation fund | At least 3 asset classes with each having a minimum allocation of 10% | Taxation depends on the respective fund’s equity and debt allocation. |
| Arbitrage fund | 65% in equity; Follows arbitrage strategy | STCG (holding period ≤ 12 months) taxed at 20% LTCG (holding period > 12 months) taxed at 12.5% LTCG up to ₹1.25 lakh in a financial year is exempt from tax |
| Equity savings fund | 65% in equity; 10% in debt; derivatives (minimum specified in scheme information document) | STCG (holding period ≤ 12 months) taxed at 20% LTCG (holding period > 12 months) taxed at 12.5% LTCG up to ₹1.25 lakh in a financial year is exempt from tax |
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.