How are multi-asset funds taxed?

Taxation of multi-asset funds can be complicated—a simple explanation of the rules and how to choose funds in this category.

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: May 16, 2024 at 6:00 am

Last Updated on May 16, 2024 at 6:44 pm

A reader says, “I am confused about the tax status of multi-asset funds. Some say they are taxed as per slab, some say like a debt fund, and some say an equity fund! Who is right? Can you please clarify?

The short answer is that each fund in this category is taxed differently. As the reader mentioned, there are three different ways in which mutual funds are taxed. This is determined by the annual average of the Indian equity or Indian ETFs (that, in turn, invest in Indian equity) holdings in a fund’s portfolio.

The annual average is understood to be either the average of the daily holdings or the annual average of monthly factsheet data with ‘annual’ meaning over the last 12 months from the date of redemption. More about this here: Should I pay tax as per slab if my fund’s equity holdings drop to 35% for one month?

If the annual average of equity holding is:

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  • 65% or more, the fund is classified as an equity fund. So, Short-term capital gains (STCG, 365 days or less) are taxed at 15% plus cess. Long term capital gains (LTCG, older than 365 days) beyond Rs. 1 lakh are taxed at 10% plus cess.
  • More than 35% but less than 65%, the fund is a non-equity fund (type 1). STCG (up to 3 years) is taxed as per slab. LTCG (beyond 3 years) is taxed at 20% plus cess with indexation benefit.
  • 35% or less, the fund is a non-equity fund (type 2). All capital gains, regardless of age, are taxed as per slab.

Now, coming to multi-asset funds. Their only restriction is to hold 10% of three asset classes (equity, bonds, commodities). So, they can be taxed in any of three ways.

For example, these are the equity holdings for March 2024 taken from the freefincal debt and hybrid fund screener.

FundDomestic Equities
Baroda BNP Paribas Multi Asset Fund(G)-Direct Plan70.0093
Axis Multi Asset Allocation Fund(G)-Direct Plan69.9033
Kotak Multi Asset Allocation Fund(G)-Direct Plan66.8014
UTI Multi Asset Allocation Fund(G)-Direct Plan66.2066
ICICI Pru Multi-Asset Fund(G)-Direct Plan66.1805
Mirae Asset Multi Asset Allocation Fund(G)-Direct Plan66.0424
Quant Multi Asset Fund(G)-Direct Plan65.8426
Tata Multi Asset Opp Fund(G)-Direct Plan65.6542
HDFC Multi-Asset Fund(G)-Direct Plan65.5119
Bandhan Multi Asset Allocation Fund(G)-Direct Plan64.8998
Aditya Birla SL Multi Asset Allocation Fund(G)-Direct Plan64.3030
Sundaram Multi Asset Allocation Fund(G)-Direct Plan64.0407
Shriram Multi Asset Allocation Fund(G)-Direct Plan63.8884
HSBC Multi Asset Allocation Fund(G)-Direct Plan61.5766
Nippon India Multi Asset Fund(G)-Direct Plan50.3507
Motilal Oswal Multi Asset Fund(G)-Direct Plan41.7835
Quantum Multi Asset Allocation Fund(G)-Direct Plan40.0870
DSP Multi Asset Allocation Fund(G)-Direct Plan39.5126
Edelweiss Multi Asset Allocation Fund(G)-Direct Plan38.9063
SBI Multi Asset Allocation Fund(G)-Direct Plan36.6564
Bank of India Multi Asset Allocation Fund(G)-Direct Plan35.4197
WOC Multi Asset Allocation Fund(G)-Direct Plan34.5547
Mahindra Manulife Multi Asset Allocation Fund(G)-Direct Plan24.0428

As we can see, some funds hold 65% or higher domestic equity. Some funds hold 35% or lower equity and some between the two limits. Investors will know the tax applicable to their holdings only if they compute the last 12 months’ average from the month of redemption.

Some AMCs, especially those that changed an equity fund to multi-asset to comply with SEBI MF categorization rules, ensure that the equity component never falls below 65%. The most prominent example is ICICI Dynamic Fund, which later became ICICI Multi Asset Fund.

What should investors do? We recommend investors use equity-oriented multi-asset funds. These are a good alternative to aggressive-hybrid funds with a small exposure to commodities (gold is usually the prominent holding). Please note that these funds would be just as volatile as equity funds.

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