These Categories Of MF Schemes Are Not Covered Under The Proposed Tax Amendment

The proposed amendment to the Finance Bill 2023 that seeks to tax all gains on mutual funds that have less than 35% exposure to domestic equity as short-term capital gains will have a direct impact on debt funds as all of them will be covered. In addition, there are some other categories like international funds, gold funds and even some hybrid funds that will also be covered under the provision. However, the important thing is which categories are likely to remain outside of this scope and here are some of them. 

Aggressive Hybrid

Aggressive hybrid funds have to maintain an equity exposure between 65% to 80% of the total portfolio and the remainder of 20% to 35% is made up by debt. They are heavily tilted towards equity and hence they don’t fall under the purview of the new amendment. A look at the various mutual funds that fall in this category shows that they are maintaining an equity component that is usually 70% or higher so they already fall under the equity taxation ambit.

Balanced Hybrid Fund

This category needs to maintain an equity component that is between 40% to 60% and the balancing exposure which would also be between 40% to 60% would be in debt. This equity exposure crosses the minimum threshold of 35% plus the important thing is that there are just a few schemes which currently operate in this category.

Dynamic Asset Allocation Or Balanced Advantage Funds

Balanced advantage funds have become quite popular with investors as they do not have to worry about changing the composition of debt and equity. Most funds tend to maintain a higher level of equity which is in excess of 50% and even when some funds take a cash call the equity component tends to be higher than the 35% level, which will keep all the funds out of the ambit of the proposed changes.

Multi Asset Allocation

Multi asset allocation funds have exposure to more than two asset classes with the addition of gold or alternative assets to the mix. The exposure to equity here too tends to be higher than 50% and this ensures that the funds would not have the impact of the proposed taxation. There is a requirement to have a minimum allocation of 10% to each asset class but this has no impact on the equity level which tends to be far higher. 

Equity Savings Funds

Equity savings funds have a very small exposure to debt and more than 65% of the funds tend to be in equity which again makes this category fall under the taxation of equity funds and will not be impacted by the proposed change. Here too, there are funds which maintain a higher allocation to cash during certain time period as seen currently but still their equity exposure is more than 35% taking them out of the proposed amendment.

Arnav Pandya is Founder - Moneyeduschool 

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.