Balanced advantage funds or dynamic asset allocation funds have attracted a massive number of investors of late. Such funds basically are a mix of debt and equity, which are dynamically managed and allocated and generally are driven depending on a rule-based model by the fund house. Such funds have no restriction on maximum and minimum allocation to debt or equity. The goal of these funds is to capture potential upside during rising market phases and limit downside when the equity markets are facing volatility.
Focused here are how the gains that you generate on balanced advantage funds get taxed.
What is the tax treatment of a balanced advantage fund?
For determining the tax liability of mutual fund gains, you must know 2 basic aspects. These include –
Fund type
From a taxation viewpoint, mutual funds can be either non-equity oriented or equity oriented. Equity-oriented mutual funds are those funds that invest a minimum of 65% of the corpus in equities. Non-equity mutual funds are those funds that invest in instruments besides company equity and stocks.
While this distinction between these two categories is usually straightforward and simple in the case of most mutual funds, it is not the same with balanced advantage funds as they are dynamic in nature considering their asset allocation. So, if a balanced fund maintains more than 65% allocation in equities, this makes it an equity-linked fund. Otherwise, if the equity allocation is less than 65%, then it would be a non-equity fund. Note that, most balanced advantage funds tend to maintain gross equity of over 65% to endow tax benefits.
Holding period
The holding period for your mutual fund may be either long-term or short-term and based on this, tax liability is determined.
What’s the tax liability in a balanced advantage fund?
Once you are aware of the above 2 aspects linked with balanced advantage funds, you can assess your tax liability in the listed way –
For equity-linked funds
If your period of holding for equity-linked funds is over a year, the gain is known as a long-term capital gain. In such a case, profits up to Rs 1 lakh in a year are tax-free; however, anything over this is subject to 10% tax. If your period of holding is less than 1 year, gains are addressed as short-term capital gains and they get taxed at 15%.
For non-equity-linked funds
If the holdings for the non-equity linked fund are below 3 years, the gains are known as short-term capital gains. The gains generated from non-equity-linked funds are taxed according to your income tax slab. In case your holdings are over 3 years, then gains are known as long-term and such gains get taxed at 20% with indexation benefits.
Ending note
A balanced advantage fund is a kind of hybrid fund, which is addressed as a dynamic asset allocation mutual fund too. Under a balanced advantage fund, asset allocation between equity and debt is dynamically managed based on the existing stock market condition. Besides this, you must also ensure to note the tax liability that you must bear on returns generated from a balanced advantage fund to make an informed decision.
