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How would I know the tax rate applicable on my investments in balanced advantage funds?

If you are liable to pay Securities Transaction Tax (STT) on your investments during redemption, then investments will be treated as equity, says Dhirendra Kumar

It is said that tax rules applicable to balanced advantage funds are the same as those to equity funds. Please elaborate whether this always holds true or only in some cases. How would I confirm the tax rate applicable before booking long-term gains?
- A.S. Khanwilker

There is a very simple way to determine whether or not your balanced advantage fund is liable for equity taxation. Just check if you need to pay Securities Transaction Tax (STT) on your investments during redemption. If yes, then the investments will be treated as equity.

Balanced advantage funds were actually designed as a tax dodge. These funds invest about 30-40 percent in equity and debt each, with the remaining in arbitrage. However, these funds dynamically manage their asset allocation based on fund managers' view of the market. The arbitrage portion of balanced advantage funds has dual benefits. It provides returns similar to liquid funds and together with equity, it enables these funds to enjoy equity-like taxation benefits.

Unlike earlier when any capital gains on equity were tax-free while the debt investments were taxable, today both equity and debt investments are taxable. Gains on equity mutual funds are liable for long-term capital gains if held for more than one year and taxed at 10 per cent. On the other hand, for debt fund investments to be liable for long-term capital gains, they should be held for a minimum of three years. Thereafter, they are taxed at 20 per cent with indexation benefit. In the majority of the cases, the taxation on equity is more beneficial than debt funds. However, this may not necessarily be the case always.

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