Balanced Fund Taxation

What are Balanced Funds?

Balanced Funds (now primarily categorised as Hybrid Funds) are mutual fund schemes that invest in a mix of equity (stocks) and debt (fixed-income) instruments. By blending these asset classes, they provide a "middle path" for investors, offering the growth potential of stocks with the stability and safety net of bonds.

• Risk Mitigation: The debt component acts as a cushion during market downturns, reducing overall portfolio volatility.
• Automatic Rebalancing: Fund managers periodically buy or sell assets to maintain the desired equity-debt ratio, ensuring your risk profile remains consistent.
• Customizable Strategies: Depending on your goals, you can choose Equity-Oriented (higher growth) or Debt-Oriented (higher stability) balanced funds.

Taxation of Capital Gains of Balanced Funds

The tax rate of capital gains of balanced funds depends on the holding period and the type of balanced fund investment. The holding period is the duration for which an investor holds the balanced fund units. In simple terms, a holding period is a time frame calculated between the purchase date and the sale of the balanced fund units.

Capital gains on balanced funds realised upon the sale of the units are categorised as follows:

Updated Taxation on Capital Gains (FY 2025-26)

The following table will summarise the taxation rates on capital gains on balanced funds:

Types of Balanced Funds and Taxation Rules 

The classification of the balanced funds depends on the degree of equity exposure and debt securities. The taxation rules also vary with the type of balanced fund chosen. 

1. Conservative Hybrid Funds

   • Allocates 75–90% to debt and 10–25% to equity to provide steady income with low volatility.
   • Average Returns: Historically 7–9.5% (higher than your 6.5–7.0% estimate in the current rate cycle).
   • Treated as Debt Funds. Gains are added to your income slab (STCG) if held for < 24 months. For > 24 months, LTCG is 12.5% without indexation.

2. Balanced Hybrid Funds

   • Maintains a roughly equal split. SEBI mandates 40–60% in both equity and debt. Note: No arbitrage is permitted in this specific category.
   • Average Returns: 8–10% on average.
   • Since equity is < 65%, these are taxed like Debt Funds (Slab rate for STCG < 24m; 12.5% for LTCG > 24m, no indexation).

3. Aggressive Hybrid Funds

   • Equity-heavy, with 65–80% in equity and 20–35% in debt.
   • Average Returns: 10–12% on average.
   • Treated as Equity Funds. STCG (< 12m) is 20%. LTCG (> 12m) is 12.5% for gains exceeding ₹1.25 lakh p.a.

4. Dynamic Asset Allocation (Balanced Advantage)

   • No fixed limits; the fund manager can shift between 0–100% equity or debt based on market models.
   • Average Returns: 8–11% depending on the model's accuracy.
   • Most maintain > 65% "gross equity" (using arbitrage) to qualify for Equity Taxation (20% STCG / 12.5% LTCG).

5. Multi-Asset Allocation Funds

   • Invests in at least three asset classes with a minimum 10% in each.
   • Average Returns: 10–13% due to gold/commodity exposure.
   • Depends on equity exposure. If equity is > 65%, it's taxed as Equity. If between 35-65%, it's taxed at 12.5% LTCG after 24 months.

6. Arbitrage Funds

   • Exploits price differences between cash and derivative markets. Minimum 65% equity exposure (mostly hedged).
   • Average Returns: 6–7.5% (similar to liquid funds but more tax-efficient).
   • Treated as Equity Funds (20% STCG / 12.5% LTCG) despite low risk.

7. Equity Savings Funds

   • A mix of net equity (25–45%), arbitrage (25–40%), and debt (10–35%). Total equity exposure is kept above 65%.
   • Average Returns: 7.5–9% on average.
   • Treated as Equity Funds (20% STCG / 12.5% LTCG over ₹1.25L).

Advantages of Balanced Funds

The main benefits of investing in balanced funds are:

• Delivers long-term returns on investment closer to equity funds but with lower volatility. 
• It combines features of volatility control, capital appreciation, and preservation. 
• It helps to achieve diversification through the rebalancing of asset allocation. 
• It awards investors decent returns and stability. 
• It is ideal for new and conservative investors. 
• It provides tax benefits based on the type of balanced fund investment choice.

Conclusion

A balanced fund is an investment option that combines the features of both equity and debt components. The taxation depends on the type of balanced fund chosen, the holding duration and the capital gains generated from these funds. This investment is ideal for medium-term investors and moderate risk-takers.