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How Are Non-Equity Mutual Funds Taxed?

We just covered how equity mutual funds taxed are in the last post. You can find it here.  There is a reason why I am calling the other mutual funds schemes non-equity funds.

Because they are all lumped together in their tax treatment.

All Debt funds – Investing in Government debt, Corporate debt, Target maturity funds the whole enchilada.

Gold funds

International funds – Even if they invest in foreign equity.

Balanced funds/Hybrid funds/Fund of Funds – That invest less than 65% in domestic equity

The capital gains tax treatment is the same for all of the above.

If the investment in any of these schemes is post 1st April 2023, there is no concession, or advantage investing whether for the long term, short term, or any term. When you redeem, and if there is a gain then the income is added to your income and you pay tax on it based on your slab rate.

The slab rate includes the Surcharge/Cess etc.

Schemes that invest between – 35% to 65% in Domestic Equity Some hybrid schemes invest that invest in multiple asset classes like gold, debt, and domestic equities. If their domestic equity allocation is between 35%-65% then the gains will be taxed as follows.

If the holding period of the investment is more than 3 years, then the cost of your holding can be increased via indexation, and the gains are calculated on the increased cost. These gains will be taxed at 20% plus indexation & surcharge.

If the holding period is less than 3 years then gains are added to your income and taxed at the marginal rate with surcharge & cess.

Dividend Payout of all or any schemes is added to your income and taxed at the marginal rate of tax.

Broadly, to recapitulate there are 3 categories:

  1. Equity Schemes – => 65% in Domestic Equity
  2. Non-equity schemes = <35% in Domestic Equity
  3. Hybrid Schemes = 35% – 65% in Domestic Equity.

It follows therefore that before you invest, you look at the fund factsheet and check what the mandate of the fund in terms of investment is to understand how the gains will be taxed.

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