Decoding Taxation of Equity, Debt & Hybrid Funds

Understanding taxation helps in deciding on the option that is more efficient for you. Here are some insights on tax aspects of Equity, Debt & Hybrid Funds.

A.EQUITY FUNDS (Listed)

There are two ways in which you may be taxed on gains from your Equity funds:

1. Tax on Dividends
2. Tax on Capital Gains

1. Tax on Dividends:

• Dividends received by investors are taxable in the hands of investors as per their income slab limit
• All dividends received on or after 1 April 2020 are taxable in the hands of the investors
• If the dividend amount is more than Rs. 5000/-, TDS at the rate of 10 per cent is applicable

2. Tax on Capital Gains:

• The capital gains are taxed at the time of redemption and subject to Securities transaction tax (STT)
• Short Term Capital Gains Tax (STCG): If the redemption is within 12 months, STCG Tax is applicable at the rate of 15 per cent
• Long Term Capital Gains Tax (LTCG): If the redemption is after 12 months, LTCG Tax is applicable at the rate of 10 per cent, above Rs. 1 lac of gains
• Grandfathering: For long term investments, any gains till 31 Jan, 2018 will be considered as grandfathered and thus will be exempt from tax
• Tax on Systematic Investment Plans (SIPs): Units redemption is on FIFO (First-In-First-Out) basis. STCG/ LTCG accordingly is applicable

B. DEBT FUNDS

There are two ways in which you may be taxed on gains from your debt funds:

1. Tax on Dividends
2. Tax on Capital Gains

1. Tax on Dividends:

• Dividends received by investors are taxable in the hands of investors as per their income slab limit
• All dividends received on or after 1 April 2020 are taxable in the hands of the investors
• If the dividend amount is more than Rs. 5,000/-, TDS at the rate of 10% is applicable

2. Tax on Capital Gains:

• The capital gains are taxed at the time of redemption
• Short Term Capital Gains Tax: If the redemption is within 36 months, STCG Tax is applicable at individual’s tax slab rate
• Long Term Capital Gains Tax: If the redemption is after 36 months, LTCG Tax is applicable at 20 per cent after indexation

INDEXATION: It is used to adjust the purchase price of an investment to reflect the effect of inflation on it.

TAX ON SIPS: Units redemption is on FIFO (First-In-First-Out) basis. STCG/ LTCG accordingly is applicable.

C.HYBRID FUNDS

Understanding taxation helps in deciding on the option/ product that is more efficient for you. Here are some insights on Taxation of Hybrid Funds:

There are two ways in which you may be taxed on gains from your Hybrid funds:

1. Tax on Dividends
2. Tax on Capital Gains

1. Tax on Dividends: Same as Equity and Debt Funds (Taxable in hands of investors – from 01 April, 2021 – 10 per cent TDS if dividend > Rs. 5,000/-).

2. Tax on Capital Gains:

√ The capital gains are taxed at the time of redemption.

√ The STCG/ LTCG depends on the asset allocation of the fund. If the asset allocation is >= 65 per cent in Equity, then the fund will be treated as Equity Oriented Fund and tax implications in relation to Equity Oriented Fund shall arise. Refer taxation relating to Equity Funds in para A above. In case the asset allocation is < 65 per cent in Equity, tax implications relating to debt fund shall arise. Refer taxation relating to Debt Funds in para B above.

Basis managing style, here are some types of Hybrid Funds:

1. Conservative & Debt Taxation: Predominantly invests in Debt, managed in conservative manner, with Debt taxation. Ex: Conservative Hybrid Fund
2. Aggressive & Equity Taxation: Predominantly invests in Equity, managed in aggressive style, Equity taxation. Ex: Hybrid Equity Funds
3. Conservative & Equity Taxation: Managed in conserve manner, Invests in Equity, Arbitrage and Debt. Maintains 65 per cent in Equity and Arbitrage for Equity taxation. Ex: Equity Savings Fund, Balanced Advantage Fund

Note: Style of managing funds differs from fund house to fund house.

√ STCG/ LTCG are taxed as per the asset allocation, i.e., Equity taxation or Debt taxation.

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