Equity-heavy balanced funds are taxed as equity funds

Fund managers of these funds always maintain at least 65% of their investments in domestic stocks

After making investments in a particular scheme, will subsequent changes in exit load affect my investments?

—Shakti Goel

Exit load is a charge levied by the fund house at the time of redeeming a mutual fund investment. It is typically expressed as a percentage of the redemption amount depending on the number of days an investor has stayed invested in the fund. For example, equity funds typically levy an exit load of 1% if redemption is made within 1 year of making an investment. Debt funds have a lower charge and for a lesser period.

Fund houses occasionally make changes to exit loads by either changing the amount or the time period that it is applicable for.

Such changes will be applicable only for investments made from the date of such announcements. Investments made prior to it will not be affected. Investments will be bound by the exit load criteria that are in force at the time it was made.

With the changes in the tax structure announced in the budget, what should one do with liquid fund investments (when holding time is 6 months) and why?


In the recent budget, the finance minister announced a couple of significant changes that affect how gains from debt funds are taxed. Specifically, the definition of what constitutes long-term holding for a debt mutual fund has been changed from 12 months to 36 months. That means, only after three years will a debt fund investment be eligible for indexation benefits while calculating the taxable gains. Until then, all gains will be treated on par with an individual’s income and be taxed at their marginal tax rate.

For a six-month investment in a liquid fund, however, there have been no changes in how gains would be treated. Even prior to the budget, they were treated as short-term gains subject to taxation as regular income at the individual’s marginal tax rate.

How are the gains from a balanced fund taxed?

—Ram Prakash

Balanced funds are equity-oriented hybrid mutual funds. They invest in both the equity and debt markets, but invest more in the former (hence the equity-oriented). From a taxation perspective, funds that invest at least 65% in domestic stocks qualify for treatment as equity funds (capital gains after one year of holding are tax exempt). Fund managers of balanced funds always maintain at least 65% of their investments in domestic stocks for this specific purpose. They are always treated on par with equity funds for taxation purposes. So, short-term gains (holding period of less than one year) are taxed at 15% (plus surcharge and cess bringing it up to 17%) and long-term gains (more than a year) are tax-exempt.

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