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In order to provide investors with a diverse
portfolio, hybrid mutual funds are a form of investment vehicle which typically
invests in a blend of stocks, bonds, and other assets. Securities like mutual
funds that have debt or equity proportions exceeding 35% but below 65% are
considered hybrid securities. Following the budget 2023, hybrid instruments
held for longer than a year are now more tax advantageous than debt funds
because they are subject to a 20% tax rate and may even be eligible for an
indexation benefit. Contrarily, the sale of debt mutual funds is subject to a slab
rate of taxation that
can reach 30%. Hence, here’s how can you lower your higher tax liability by
investing in hybrid funds based on a discussion with multiple industry experts.
Atul Sharma, Founder, Lex N Tax
Investing in hybrid funds can potentially help
lower your tax liability, but it is important to understand how hybrid funds
work and how they can impact your taxes.
Hybrid funds are mutual funds that invest in a
mix of equity and debt securities. They can be classified into three categories
based on their asset allocation: conservative, balanced, and aggressive.
Conservative funds typically have a higher allocation towards debt securities,
while aggressive funds have a higher allocation towards equity
securities.
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When you invest in a hybrid fund, you are
indirectly investing in both equity and debt securities. The returns generated
by these funds are a combination of dividend from equity and interest income from
debt. In India, equity-oriented hybrid funds have a tax advantage over pure
debt funds, as they qualify for long-term capital gains tax of 10% without
indexation on gains above Rs. 1 lakh if held for more than one year. However,
pure debt funds are taxed at a higher rate, based on the individual’s tax
bracket. Amendment to finance bill 2023 has scrapped the benefit of indexation
on debt mutual fund. Earlier it was taxed at the rate of 20% with indexation
benefit if held for more than three years.
In India, dividend income from mutual funds is
subject to a dividend distribution tax (DDT). However, equity-oriented hybrid
funds (where at least 65% of the fund’s assets are invested in equities) are
exempt from DDT. So, if you invest in such a hybrid fund and earn dividends,
you will not have to pay any DDT, which can result in lower tax liability. It
is also important to note that if hybrid fund is Hybrid Equity oriented funds
(Investment in Equity is≥ 65%) held for less than 1 year then it will attract
short term capital gain u/s 111A at 15%.
Investing in hybrid funds, especially
equity-oriented ones, can potentially help reduce your tax liability by generating
long-term capital gains, which are taxed at a lower rate than short-term
capital gains or interest income. However, it is important to note that hybrid
funds are subject to market risks (due to its equity element) and can
potentially result in losses.
Additionally, it is crucial to consult a financial advisor
or tax professional and do proper research on past track record of fund before
investing in any financial instrument to ensure it aligns with your overall
financial goals and is suitable for your individual tax situation.
Source link: https://www.livemint.com/money/personal-finance/how-debt-investors-can-lower-their-higher-tax-liability-by-investing-in-hybrid-funds-11682875480218.html
Website
link: https://lexntax.com/
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