Balanced Fund Taxation

A balanced fund is a combination of equity and debt exposure. A single portfolio of a balanced fund, equity stock, bond, and market-linked components. These funds are ideal for medium-term investors looking for safety, income, and moderate capital appreciation.

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Balanced funds have considerable tax exemptions for equity-oriented funds as they are invested in the stock market. For debt-based balanced funds, the gains achieved are not eligible for tax exemption due to less volatility and lower returns. The taxation policies depend on the type of balanced funds opted, asset class, and investment duration. 

Taxation of Capital Gains of Balanced Funds

The tax rate of capital gains of balanced funds depends upon 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 realized upon the sale of the units are categorized as follows:

Type of Balanced fund 

Short Term Capital Gains

Long Term Capital Gains

Equity-oriented balanced funds

Shorter than 12 months

12 months and longer

Debt-oriented balanced funds           

Shorter than 36 months         

36 months and longer

The rate of taxation of capital gains on balanced funds depends on the portfolio's equity exposure. If the equity exposure exceeds 65%, the applied taxation rules will be similar to equity funds and vice-versa. Hence, it is crucial to know the equity exposure of your chosen balanced fund scheme. 

The following table will summarize the taxation rates on capital gains on balanced funds.

Type of Balanced fund 

Short Term Capital Gains

Long Term Capital Gains

Equity-oriented balanced funds

15% + cess + surcharge

Up to Rs 1 lakh p.a. is tax-exempted. Any capital gains achieved are above Rs 1 lakh is taxed at 10% + cess + surcharge

Debt-oriented balanced funds           

Taxed as per the investor’s slab of income 

20% + cess + surcharge

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 Balanced Funds

    This scheme follows a conservative approach where a major portion of the assets are allocated to low-risk financial instruments like bonds and money-market securities. The primary purpose of this strategy is to protect the principal amount and achieve steady income for the investor. 

    As per SEBI guidelines, conservative balanced funds must have an allocation of 75 to 90% in debt assets and 10-25% in equity-linked instruments. It helps achieve a steady flow of income rather than wealth accumulation. Traditionally, these funds provide returns in the range of 6.5-7.0% on average. 

    For short-term capital gains of holding period less than 36 months, the tax is deducted as per your income tax slab. For long-term capital gains of holding period greater than 36 months, a tax of 20% is deducted along with indexation benefits.

  2. Balanced Hybrid Funds

    Investors who are unclear about their risk profile can consider investing in balanced hybrid funds. These funds have equity and debt allocations in similar proportions. According to SEBI guidelines, these funds require an asset allocation of 60-70% in each category. 

    Traditionally, these funds provide returns in the range of 7-8% on average. In addition, the taxation rules are similar to those followed in conservative balanced funds.

  3. Aggressive Balanced Funds

    Investors with decent or high-risk appetites can opt for aggressive balanced funds. A significant portion is allocated to equity instruments rather than debt securities. As per SEBI, the asset allocation must be between 65-80% in equity and equity-related products for these funds. The remaining funds are invested in debt securities. 

    Traditionally, these funds provide returns in the range of 7.0 -8.0% on average. The taxation rules of equity funds are applicable. It is considered a short-term capital gain and the tax levied is 15%. 

    If the profits are achieved after selling the units post 12 months, it is considered a long-term capital gain and taxed at 10% for gains more than Rs 1 lakh with no indexation benefit.

  4. Dynamic Asset Allocation Fund

    These balanced funds allow investment in both equity and fixed income products. The investor can change the asset allocation of the portfolio according to the market situation. The allocation ratio is opened for tactical modification based on market conditions. For instance, if the interest rates are low, a significant portion of the assets are allocated to equity and equity-linked instruments and vice versa. 

    Traditionally, these funds provide returns in the range of 7 - 9%. The taxation for dynamic asset-allocation funds largely depends on the asset allocation on equity. It means if 65% of funds are allocated to equity or equity-linked instruments, the tax rules are as of equity funds. If the equity or equity-linked instruments holding is less than 65%, it is taxed like debt funds.

  5. Multi-Asset Allocation Funds

    The balanced funds invest in different asset classes. SEBI says to invest in at least three asset classes with a minimum fund allocation of 10% in each of them. Traditionally, these funds provide returns in the range of 10 - 12% on average.

    The short-term capital gains held for less than 36 months added to the investment income are taxed as per the investor's income tax slab. In contrast, taxes for long-term capital gains held for more than 36 months is set at 10% along with indexation benefits.

  6. Arbitrage Funds

    The primary objective of these funds is to generate income and capital appreciation by investing mainly in arbitrage opportunities in the cash and derivative sections of the equity market.

    The scheme allows arbitrage investment through spot and futures prices of exchange-traded equities and derivatives. Traditionally, these funds provide returns in the range of 6 -7% on average. The taxation rules applicable are similar to aggressive balanced funds.

  7. Equity Savings Funds

    These balanced funds invest in equity and its related instruments. As per SEBI, a minimum allocation of 10% in debt instruments is mandatory even if the total assets invested in equity-linked instruments is 65%. The balanced funds also look out for investment in arbitrage opportunities provided by the market.

    Traditionally, these funds offer returns in the range of 7 - 8% on average. These funds are treated as equity schemes when it comes to taxation similar to aggressive balanced funds.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

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.  

In 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.

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