How equity hybrid mutual funds are taxed under rules depends on one test, the share of the portfolio in domestic equity: at 65% or more the fund is taxed like an equity fund, with 20% on gains within 12 months and 12.5% above ₹1.25 lakh after that. Below that line the treatment changes, and “hybrid” on the label tells you little. This is general information, not tax advice.
The 65% Test
Classification drives everything, not the fund’s marketing name.
- A fund holding more than 65% in domestic equity is “equity-oriented” for tax purposes
- That line sits at 65% under both SEBI’s category rules for aggressive hybrids and the Income Tax Department’s test, according to one fund house
- Hedged arbitrage positions count towards the 65% for equity-oriented treatment, according to guides on balanced advantage funds
- Below 65%, the treatment depends on how much is in debt
Equity-Oriented Hybrids
Funds clearing the 65% bar get equity tax treatment.
- Gains within 12 months: 20% as short-term capital gains
- Gains after 12 months:5% on long-term gains above ₹1.25 lakh a year, without indexation
- The ₹1.25 lakh exemption is shared across all your equity shares and equity-oriented funds
- These rates apply to transfers on or after 23 July 2024
- Aggressive hybrid funds, with 65% to 80% in equity, are the standard example
Balanced Hybrids: The 24-Month Rule
Funds in the middle fall between two stools.
- Funds with 35% to 65% in equity are neither equity-oriented nor debt-oriented, according to one guide, and use a 24-month long-term threshold
- After 24 months, gains are taxed at 12.5% without indexation, with no ₹1.25 lakh exemption
- Before that, gains are short-term and taxed at your slab rate
- One example from a tax guide is a 60% equity and 40% debt fund, which is neither equity-oriented nor debt-specified, so it needs 24 months
Debt-Oriented Hybrids
Low-equity hybrids are taxed like debt funds.
- For units bought on or after 1 April 2023, gains from specified mutual funds are deemed short-term and taxed at your slab rate, whatever the holding period
- From FY 2025-26, the “specified mutual fund” definition narrowed to funds with more than 65% in debt and money market instruments, a change made by the Finance (No. 2) Act 2024
- Under the old definition, any fund with 35% or less in equity was caught
- Conservative hybrids, with 10% to 25% in equity, fall on the specified side
Where the Popular Categories Land
These are the usual classifications, but fund-level details can differ.
- Aggressive hybrid: equity-oriented
- Balanced advantage or dynamic asset allocation: equity-oriented if its equity exposure including arbitrage stays above 65%, otherwise usually “other funds,” so check your fund
- Equity savings: usually equity-oriented, with about one-third each in equity, debt and arbitrage
- Arbitrage: taxed as equity
- Multi-asset allocation: usually “other funds” with a 24-month rule, though one guide says funds with low equity get debt treatment, so it depends on the allocation
- Conservative hybrid: slab rate as a specified fund
Same Gain, Very Different Bills
The label can change your tax by a factor of six.
- Take a ₹2 lakh gain after 18 months in an aggressive hybrid: taxable gain is ₹75,000 after the ₹1.25 lakh exemption, and tax at 12.5% is ₹9,375
- The same ₹2 lakh gain in a conservative hybrid is taxed at your slab rate, so ₹60,000 at 30%
- In a balanced hybrid sold at 18 months, it would also be short-term at slab rate, so ₹60,000 at 30%
- These figures exclude surcharge and cess, and the slab rate is an assumption
Dividends and IDCW
Payouts from any hybrid fund follow different rules.
- Dividend, or IDCW, is taxed at your slab rate as income from other sources, whichever way the fund is classified
- TDS applies when payouts from a fund house exceed the threshold, so check your statements
- Growth options avoid dividends altogether, so tax arises only when you sell
Checking Your Fund
Don’t guess the classification.
- Read the fund’s factsheet or scheme information document for its equity allocation
- Ask the fund house how it classifies the scheme for tax and whether it uses arbitrage to stay above 65%
- Equity exposure can move over time in dynamic funds, so a fund’s classification isn’t guaranteed to stay fixed
- Keep purchase dates, since the holding period depends on when you bought each unit
Rules to Watch
Section numbers and thresholds may differ in what you read.
- Guides still quote Sections 111A, 112A and 50AA for these rules
- The Income-tax Act, 2025 now applies from tax year 2026-27, so renumbering is possible
- One guide notes Budget 2026 didn’t change the equity rates, though I couldn’t verify every claim made about it
FAQs
Q1. How is an aggressive hybrid fund taxed?
Like an equity fund, with 20% on gains within 12 months and 12.5% on long-term gains above ₹1.25 lakh.
Q2. Are balanced advantage funds taxed as equity?
Often, when equity exposure including arbitrage stays above 65%. Otherwise they usually follow the 24-month rule, so check the fund.
Q3. Are conservative hybrid funds taxed as debt funds?
Yes, for units bought on or after 1 April 2023. Gains are taxed at your slab rate whatever the holding period.
Q4. What is the holding period for a 60% equity hybrid?
More than 24 months for long-term treatment, taxed at 12.5% without indexation, according to one guide.
