How Hybrid Fund Investments Are Taxed Now

  Author: Sanjay Sharma

The recent re-categorisation and rationalisation in mutual funds has brought about many changes among mutual fund offerings. One of them is that hybrid mutual funds—which invest in a combination of debt and equity—and were popularly offered as “balanced funds”, are now being sold as hybrid equity funds and hybrid debt funds. Since balanced funds have been very popular in the recent past, existing investors would be wondering about the tax treatment of this new mutual fund category. Here is a brief lowdown about it.

The 65% equity investment classification Well, the basis of taxation remains the same as before. Hybrid funds with equity investments in excess of 65% of their total investments continue to be taxed as equity mutual funds and those with less than 65% investments in equities are taxed as debt funds. Here’s what it means.

Hybrid equity fund taxation For hybrid equity funds, capital gains for investments of more than one year, you need to pay long term capital gains tax of 10%. This is for the capital gains over the annual limit of Rs 1 lakh. For capital gains made on investments in less than one year, short term capital gains tax of 15% will have to be paid.

Hybrid debt fund taxation For hybrid debt funds, for capital gains made on units three years old or more, long term capital gains tax of 20% will need to be paid. Like debt funds, here too, you get inflation indexation benefit, where the cost of acquiring the units gets enhanced by the proportion by which the inflation index is enhanced during the period of the investment.