12 June 2016
Dear Sir,
In case of hybrid mutual funds,is it so that if equity forms part of more than 65% of the total asset allocation,then the investment will qualify as an equity oriented mutual fund?
13 June 2016
in my opinion its not called as equity mutul fund, but if you want to know for deduction u/s 80C then its to be check that every Mutul fund not eligible for that section.
03 August 2024
Yes, you're correct. In the case of hybrid mutual funds, the classification into equity-oriented or debt-oriented mutual funds affects the taxation of capital gains. Here’s how it works:
### **1. Equity-Oriented vs. Debt-Oriented Mutual Funds:**
- **Equity-Oriented Mutual Funds:** - **Definition:** A mutual fund is considered equity-oriented if it invests more than 65% of its assets in equity shares of companies. - **Taxation:** Gains from equity-oriented mutual funds are taxed as follows: - **Short-Term Capital Gains (STCG):** Gains from equity-oriented mutual funds held for less than one year are taxed at 15% plus applicable cess. - **Long-Term Capital Gains (LTCG):** Gains from equity-oriented mutual funds held for more than one year are taxed at 10% without indexation or 20% with indexation, depending on the investor’s choice.
- **Debt-Oriented Mutual Funds:** - **Definition:** If a hybrid mutual fund invests less than 65% in equities, it is considered a debt-oriented mutual fund. - **Taxation:** Gains from debt-oriented mutual funds are taxed as follows: - **Short-Term Capital Gains (STCG):** Gains from debt-oriented mutual funds held for less than three years are taxed as per the individual’s income tax slab. - **Long-Term Capital Gains (LTCG):** Gains from debt-oriented mutual funds held for more than three years are taxed at 20% with indexation benefits.
### **2. Hybrid Mutual Funds:**
Hybrid mutual funds invest in a mix of equity and debt instruments. The classification of hybrid mutual funds into equity-oriented or debt-oriented depends on their asset allocation:
- **If the equity component exceeds 65%:** The hybrid mutual fund is treated as an equity-oriented mutual fund for tax purposes. Therefore, gains are subject to equity mutual fund taxation rules.
- **If the equity component is 65% or less:** The hybrid mutual fund is treated as a debt-oriented mutual fund. Taxation follows the rules for debt mutual funds.
### **3. Capital Gain Computation for Hybrid Funds:**
- **Equity Component:** - If the hybrid fund invests more than 65% in equities, the capital gains from the equity portion are taxed according to equity mutual fund rules.
- **Debt Component:** - The portion of the fund invested in debt instruments is taxed according to debt mutual fund rules.
### **4. Practical Example:**
- **Investment Breakdown:** Suppose a hybrid mutual fund has 70% in equities and 30% in debt. - **Equity Portion (70%):** Gains from this portion will be taxed as gains from equity-oriented mutual funds. - **Debt Portion (30%):** Gains from this portion will be taxed as gains from debt-oriented mutual funds.
### **5. Summary:**
- **Classification:** The tax treatment of a hybrid mutual fund depends on whether the equity allocation is more than 65% or not. - **Tax Treatment:** If the equity allocation is more than 65%, the entire fund’s gains are taxed as equity gains. If it’s less than 65%, the gains are taxed according to the proportion of equity and debt investments.
Always consult a tax professional or financial advisor to accurately compute and report capital gains, especially when dealing with complex investments like hybrid mutual funds.
CAclubindia
