What is the Taxation on Hybrid Funds?
The taxation of Hybrid Funds has changed significantly from April 1, 2023, following the amendments announced in the Budget 2023. Hybrid funds can now be taxed based on how much of the fund is invested in stocks (equity) or bonds (debt).
- Equity Taxation applies for Aggressive Hybrid Funds (Equity allocation above 65%)
If a hybrid fund invests more than 65% of its assets in the stock market, it is taxed like an equity fund. This means any gains are subject to the tax rules for equities, where the tax on long-term capital gains (after 1 year) is 12.5%, and short-term capital gains (held for less than 1 year) are taxed at 20%. - Debt Taxation applies for Conservative Hybrid Funds (Debt allocation above 65%, purchased before April 1, 2023)
If the fund holds less than 35% in equities, it is taxed as a debt fund. Debt fund taxation is similar to hybrid funds with less than 65% equity. This means that if you sell the fund within 24 months, Short-term capital gains are taxed based on your income tax slab. If you hold the fund for more than 24 months, the long-term gains will be taxed at 12.5%. - Debt Taxation applies for Conservative Hybrid Funds (Debt allocation above 65%, purchased after April 1, 2023)
If the fund holds less than 35% in equities, it is taxed as a debt fund. Debt fund taxation is similar to hybrid funds with less than 65% equity. Short-term capital gains are taxed based on your income tax slab. - Hybrid Taxation for Dynamic Hybrid Funds (Equity allocation b/w 35% to 65%)
If the fund invests between 35% and 65% in the equity market. This means that if you sell the fund within 24 months. Short-term capital gains are taxed based on your income tax slab. If you hold the fund for more than 24 months, the long-term gains will be taxed at 12.50% w/o Indexation
(Above details as on 1st Sep 2024)
What Is Indexation?
Indexation is a way to adjust your gains based on inflation, so you pay less tax. It uses the Cost Inflation Index (CII) provided by the government to calculate how much inflation has reduced the value of your returns. This reduces the taxable amount of your long-term capital gains.
Tax on Dividends
Any dividends you earn from mutual funds are now taxed according to your income tax slab, which means they are added to your total income and taxed at the applicable rate.
Understanding the taxation of hybrid funds is important for making smart investment decisions. These can be complex, and making the most of your investment requires clarity on tax rules and how different fund types are treated. A mutual fund distributor or advisor can help you choose the right hybrid fund based on your goals, whether it’s retirement planning, wealth creation, or an emergency fund, while aligning your investment decisions with your overall tax outlook.
