A fund of fund (FoF) is a mutual fund that invests in other mutual funds. Equity oriented FoF is a fund that invests 90% or more in other ETFs which invests 90% or more in domestic equities.
About the author: Manmohan Sethumadhavan is a freelancer, investor, and personal finance enthusiast “in search of the absolute truth.” You can follow Manu on Twitter @ManuTsr. Also, read his article: How to calculate LTCG with Grandfathering for equity shares that split – How to fill Schedule 112A.
For units acquired before 01-APR-2023, the taxation is as follows.
- STCG (period of holding less than 1 year) @15%
- LTCG (period of holding 1 year and above) @10% for gains above 1 Lakh.
LTCG u/s 112A:
“The tax payable by the assessee on capital gains from transfer of a long-term capital asset being a unit of an equity oriented fund shall be calculated on such gains exceeding one lakh rupees at the rate of ten per cent. Equity oriented fund means a mutual fund where it invests a minimum of 65% in equity shares of listed domestic companies or in case of FoFs, a minimum of 90% in another ETFs, and such ETFs invests a minimum of 90% in equity shares of listed domestic companies.”
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STCG u/s 111A:
“The tax payable by the assessee on capital gains from transfer of a short-term capital asset being a unit of an equity oriented fund shall be calculated on such gains at the rate of fifteen per cent. Equity oriented fund shall have the meaning as defined in section 112A.”
Section 50AA was introduced by the Finance Act, 2023, w.e.f. 01-APR-2024. This was initially intended to amend the taxation of Market-linked debentures and the title of the section is still “Special provision for computation of capital gains in case of Market Linked Debenture”. Later “Specified Mutual Funds” were also included in the section, which changed the taxation of debt mutual funds satisfying certain conditions.
50AA:
“Where the capital asset (in case of capital gains) is a unit of a Specified Mutual Fund acquired on or after 01-04-2023 or a MLD, the gains shall be deemed to be short-term capital gains. ‘Specified Mutual Fund’ means a fund, where 35% or less is invested in the equity shares of domestic companies.”
Though it seemed this was intended to change the taxation of some debt funds, deliberately or not, all Fund of Funds fall under this category, since such funds never invest in any equity shares directly. Thus the capital gains from Equity Oriented Fund of funds acquired on or after 01-04-2023 shall be always deemed to be short-term as they are “Specified Mutual Funds”. But since they are “Equity Oriented Funds” as per section 112A, the short-term gains are calculated as per section 111A, and thus @15% flat.
Note that the Fund of Funds which do not satisfy the 90% condition as per 112A, (like debt-oriented, equity FoFs investing in other Mutual funds (not ETFs), multi-asset FoFs, foreign FoFs, etc.) will be taxed as per slabs for units acquired on or after 01-04-2023, irrespective of holding period.
To summarise:
| For units acquired on or after 01-04-2023 | |
| Type of Fund | Taxation (irrespective of holding period) |
| Equity oriented FoF | 15% flat |
| Other Equity FoF | As per slabs |
| Other FoF | As per slabs |
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