Which mutual funds are still taxed at 20% with indexation benefits?

A reader says, ” Can you please let me know funds with indexation benefits apart from Parag Parikh Dynamic asset allocation fund and  Edelweiss Multi Asset Allocation Fund excluding EquitySavings and Arbitrage?” A discussion. Let us begin with some context.

Note: Tax rules change often. The rules mentioned here are valid as of April 2024 (at the time of writing). If you read this article later, please check the existing tax rules.

Disclaimer: No fund is mentioned in this article as a recommendation. Investors should not buy risky funds to save on tax.

Mutual funds and ETFs can be taxed in three different ways following the amendment to the finance bill 2023, announced in March 2023.

Taxation status from 1st April 2023

• Funds holding 65% or more of Indian equity or Indian equity ETFs are equity funds. Short-term capital gains from units aged one year or less will be taxed at 15% with cess. Gains from older units are tax-free up to Rs. one lakh. Above this, they will be taxed at 10% without indexation.
• Funds holdings less than 65% Indian equity but more than 35% Indian equity are non-equity funds (we will refer to these as class I). Gains from units purchased on or before 3Y are short-term gains and taxed as per slab, and gains from older units are taxed at 20% with indexation.
• Funds holding less than or equal to 35% equity will be taxed as per slab, regardless of the age of the unit. Let us call these class II non-equity funds. This will only apply to fresh purchases made from 1st April 2023.

Parag Parikh Conservative Hybrid Fund is a class II non-equity fund. So, its gains will always be taxed as per slab.

(1) Parag Parikh Dynamic Asset Allocation Fund and  (2) Edelweiss Multi Asset Allocation Fund are class I non-equity funds. It will use direct equity and arbitrage positions to maintain equity allocation greater than 35% but less than 65%. So, its long-term gains will be subject to 20% tax with indexation.

This rule change resulted in the introduction of Balanced Hybrid Funds. These invest in equity (40-60%) and debt (40-60%) instruments. No Arbitrage would be permitted in this scheme. So, their long-term gains will be subject to 20% tax with indexation.  Currently, there are two funds in this category:

• (3) 360 ONE Balanced Hybrid Fund  launched in Sep 2023
• (4) WhiteOak Capital Balanced Hybrid Fund launched in Oct 2023

To check for any more such funds, we look at the Feb 2024 factsheets (at the time of writing, not all AMCs have released the Mar 2024 factsheet).  The data below will be updated from the April 2024 edition of our monthly debt and hybrid fund screeners.

Note: This is only data for one month. This is only to create a shortlist for further investigation by the interested reader. They should dig deeper into past factsheets and fund brochures or AMC websites to understand the taxation status of the funds. Please note that some funds may change taxation status. See: Should I pay tax as per slab if my fund’s equity holdings drop to 35% for one month? And Should I pay more tax if my fund’s equity holdings drop below 65%?

List of hybrid mutual funds taxed with indexation benefits* This list excludes aggressive hybrid, arbitrage and equity savings funds classified as equity funds for taxation. No claim is made that this list is exhaustive.

* It may be taxed like equity or class I non-equity funds, depending on the average equity holding of the last 12 months from the redemption date.