Taxation of multi-asset allocation funds

Multi-asset allocation funds are hybrid mutual funds that combine different asset classes to create a broadly diversified portfolio. These funds are mandated to invest a minimum of 10 per cent across three different asset classes - generally equity, debt, and commodities such as gold. Many investors are keen to understand how these funds are taxed. So let's understand it.

Calculating the tax on these types of funds depends on the asset allocation. A fund is considered an equity-oriented fund if it invests more than 65 per cent in domestic equities, or else it's treated as a non-equity fund.

Multi-asset mutual funds usually do not follow a strict allocation between equity and fixed income. These funds change their allocation dynamically on several factors, like the market condition, etc. Here we take the annual average of the monthly average allocations to equity to derive whether at least 65 per cent of the fund is invested in equities or not. They are then taxed accordingly.

Equity-oriented funds are taxed just like any other equity fund. If they are held for more than one year, it qualifies as a long-term capital gain. But if the gain is above Rs 1 lakh, it is taxed at the rate of 10 per cent. If the holding period is one year or less, it is termed a short-term capital gain and is taxed at the rate of 15 per cent.

In the non-equity-oriented fund, the holding period is less than three years, the gain is termed as short-term capital gain and is added to the income and it is taxed as per the investor's income slab. But if the holding period is more than three years, it is counted as a long-term capital gain and is taxable at 20 per cent after indexation.

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Joint mutual fund and income tax

This article was originally published on June 08, 2022.