Mutual Funds: How Multi Asset Allocation Funds Are Taxed?

How income tax is paid on income from mutual funds? This question of investors is usually answered by dividing mutual funds into debt funds and equity funds. There is tax saving on mutual funds falling in the category of equity funds, whereas this is not the case with debt funds. But the case of the Multi Asset Allocation Fund is a little different. This is because how much tax will be levied on the income earned from multi-asset allocation funds cannot be told just by hearing the name of the fund. Income tax may have to be paid at different rates on the earnings of different funds falling in this category. In fact, to know how much tax will be charged on the income from a particular multi-asset allocation fund, it is important to look at the asset allocation of that specific fund. 

What are multi-asset allocation funds?

The reason why the tax treatment of multi-asset allocation funds is different from other funds is their different character. In fact, the category of multi-asset allocation funds includes such mutual funds which, along with equity and debt, also invest in third asset classes like gold or real estate. A mutual fund is called a multi-asset allocation fund only when its investment is at least 10-10 per cent in all three asset classes (equity, debt and gold/real estate). After this 30 per cent mandatory investment, the fund manager can allocate the remaining funds as per his own discretion. 

Tax liability is decided according to fund allocation

It is clear from the definition of multi-asset allocation fund that the asset allocation of different funds falling in this category can be different. This is why their tax treatment cannot be the same. If a fund's allocation to equity is more than 65 per cent, its tax treatment will also be like that of equity funds. Also, if there is a profit of up to Rs 1 lakh during a financial year by selling the unit after 3 years, then no income tax will have to be paid on it. Even if the profit on selling the unit after 3 years is more than Rs 1 lakh in a year, Long Term Capital Gains (LTCG) tax at the rate of 10 per cent will have to be paid on it. But if you hold the unit for more than one year and less than 3 years, then you will have to pay Short Term Capital Gains (STCG) tax at the rate of 15 per cent on the profits made from it. If you hold for less than 1 year, you will have to pay tax as per the slab.

Tax on equity allocation less than 65% 

If you sell such funds after holding them for more than 3 years, then you have to pay income tax at the rate of 20 per cent on the profit made on it. But if you make profits after holding such funds for less than 3 years, then you will have to pay tax on the profits as per the income tax slab. Whereas multi-asset allocation funds whose equity allocation is less than 35 per cent will always have to pay tax as per the slab on the sale proceeds, irrespective of the holding period.

Taxation of Multi-Asset Allocation Funds of Funds (FoFs)

Profits on investments made in Multi-Asset Allocation Fund of Funds (FoFs) on or after April 1, 2023, will have to be included in the income and tax will be paid as per the applicable slab. But if the investment in FoF is made before April 1, 2023, and is sold after holding it for more than three years, then the profit earned will have to be taxed at the rate of 20 per cent after giving indexation benefit. Whatever profit will be made on selling before 3 years, will be added to the income and income tax will be charged as per the slab.