How are hybrid funds taxed?

With the popularity of investing through mutual funds among Indian investors going up, hybrid mutual funds have emerged as one of the most popular choices. 

Here, we have not only introduced hybrid funds to you but have also covered what taxation of mutual funds specify for this fund class.

What is a  hybrid fund?

As the name suggests, hybrid mutual funds are those funds which invest in a combination of asset classes depending upon the stated objectives of the fund. It could be a combination of equity, debt securities, and money market instruments. The aim is to diversify the portfolio to mitigate the  risk generally associated with investing in equity  by also investing in  debt.

What are the types of hybrid funds?

All hybrid funds invest in a mix of debt and equity securities and fall into seven different types. These are segregated based on the percentage of funds allocated to different classes of assets based on SEBI regulations. Here is an overview of the same. 

Taxation of hybrid mutual funds 

For taxes, hybrid funds are classified into two classes, i.e., equity oriented mutual funds and debt-oriented mutual funds. Suppose a hybrid mutual fund has allocated more than 65% of its assets towards equity instruments, it shall be treated as an equity-oriented mutual fund. Any fund allocation otherwise shall change the treatment of funds as a debt-oriented mutual fund for taxation.

Note: The Union budget of 2023 amended the taxation of debt funds. From April 1, 2023, if an investor purchases units of debt mutual funds, the capital appreciation on sales would always be taxed as per the tax slab rate of the investor. Essentially, all gains will be categorised as short term and taxed at your slab ratee. 

Taxation of Dividend Income on Hybrid Mutual Funds

After Union Budget 2020, the dividend income from all types of mutual funds is taxable as per the applicable tax slab rate of the investor. 

However, AMCs will also deduct  10% tax at source if your dividend income exceeds ₹5,000 in any financial year. 

Takeaway

Hybrid mutual funds aim to offer you returns associated with equity instruments while providing the security of debt instruments simultaneously. It is also a reason that makes these funds so popular among some investors.