Capital gains taxation of mutual funds depends on how much the fund invests in equity and debt, with hybrid funds having different equity-debt allocations leading to varying tax treatments based on their portfolio composition. According to reports from Mint, hybrid funds invest in both equity and debt instruments, offering growth potential of equities along with stability of debt instruments, but their tax treatment varies significantly across different types of hybrid funds.
The taxation framework distinguishes between equity-oriented hybrid funds and debt-oriented hybrid funds based on their asset allocation. As reported by Mint, equity-oriented hybrid funds invest at least 65% in equity and related instruments, while debt-oriented funds invest at least 65% in debt instruments or no more than 35% in equity instruments. Conservative hybrid funds maintain 10% to 25% equity and 75% to 90% debt, balanced hybrid funds have 40% to 60% equity and 40% to 60% debt, and aggressive hybrid funds allocate 65% to 80% in equity and 20% to 35% in debt.
Equity-oriented hybrid funds face short-term capital gains (STCG) taxation at 20% for units sold within 12 months of purchase, while long-term capital gains (LTCG) are taxed at 12.5% for holdings exceeding 12 months. According to Mint, LTCG up to ₹1.25 lakh in a financial year is exempt from tax for equity-oriented funds. The list includes aggressive hybrid funds, arbitrage funds, and equity savings funds, all maintaining at least 65% equity allocation.
Debt-oriented hybrid funds, including conservative hybrid funds, face all capital gains taxed at the investor's applicable income tax slab rate regardless of holding period. As reported by Mint, this applies to both short-term and long-term gains, with the pure debt-oriented category limited to conservative hybrid funds maintaining 10% to 25% equity allocation.
Dynamic asset allocation funds and multi-asset allocation funds follow different taxation rules based on their respective fund structures. According to Mint, dynamic funds may qualify for equity taxation if maintaining at least 65% equity exposure, while multi-asset funds require at least 3 asset classes with minimum 10% allocation each. The taxation depends on the fund's actual equity and debt allocation at the time of redemption.
