How is a balanced advantage fund taxed?

Balanced advantage funds are hybrid mutual funds, which have exposure to debt and equity instruments. Such funds usually change their equity and debt exposure according to the changing valuation of the equity as per the rule-based model designed by the fund house. Such models help eliminate human interventions during decision-making and allow you to earn risk-adjusted returns.

Discussed here is the tax treatment of the capital gains on balanced advantage funds. But let’s first learn a little more about such funds and understand the reasons to invest in them.

What are BAFs?

As mentioned above BAFs invest in both debt and equity instruments and dynamically manage the allocation between both instruments, which is generally based on the in-house proprietary model. Such funds have no restriction on the allocation limit to debt or equity. The major objective of this fund is to capture the upside risk during rising market conditions and restrict the downside risk when equity markets are in a volatile condition.

What are the reasons to invest in BAFs?

• Aims to offer long-term returns through investment in equity instruments at lower volatility.
• Aims to offer regular income and stability through exposure to debt and money market instruments.
• Aims to yield capital gains through dynamic management and allocation of equity according to the changing market conditions.
• Rebalancing decisions of the portfolio are generally dependent on time-tested and well-defined models with no biases.
• Combines features of volatility control, capital preservation and capital appreciation.

What is the tax treatment of BAFs?

To decide on the tax treatment of mutual fund gains, you require knowing two important things –

Fund type –

From a taxation viewpoint, mutual funds are non-equity or equity linked. Equity-linked mutual funds invest at least 65 per cent of their corpus in equities and equity-linked instruments. In contrast, non-equity-linked mutual funds invest majorly in fixed income instruments.

As Balanced Advantage Funds are a mix of both equity and debt, classifying between the two-fund type i.e., equity and non-equity is not straightforward. Note that, if a BAF has over 65 per cent corpus allocation in equities, this would make it an equity-oriented fund. Otherwise, an equity exposure of below 35 per cent and more than 65 per cent in debt would mean it is a non-equity fund. Remember, to provide a higher tax benefit, most BAFs tend to contain an equity exposure of over 65 per cent.

Holding period –

While non-equity funds are always short-term, equity funds may be categorised as short-term or long-term, as shown below –

Determining tax liability –

Being aware of the above two details can help you understand your tax liability on BAFs.

For equity-linked funds –

If your period of holding is one year and above, the capital gains are known as long-term gains. So, long-term capital gains of up to Rs 1 lakh are tax-free and anything over this is taxed at 10 per cent. In the case you hold the investment for less than one year, the capital gains are known as short-term gains, whichattracts a tax of 15 per cent.

For non-equity funds –

From 1^st April 2023, debt mutual funds no longer get indexation benefits and are deemed as short-term gains. Thus, the gains generated in debt funds are included in your taxable income and taxed as per your income tax slab. Previously, long-term gains registered on debt mutual funds were taxed at 20 per cent with indexation benefits.

Ending note

As an investor, if you want exposure to both debt and equity, then you may invest in BAFs. With BAF, you can get equity exposure, which has a high potential to generate higher returns over the long term by a wide margin and provide tax benefits if you remain invested for over a year. Besides this, the exposure to debt instruments in BAF provides stability to your investment portfolio during volatile equity market conditions.