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Mutual funds provide the benefit of diversification to investors by creating a basket of portfolio securities. A Fund of Funds (FoF) goes a step ahead to invest in other mutual fund schemes instead of directly investing in equity, debt securities, etc.
Taxation of Fund of Funds
Income tax laws classify mutual funds, including FoFs, into two categories - equity-oriented funds and other than equity-oriented funds. An equity-oriented fund must invest at least 65% in equity and equity-related instruments, but the classification criteria for Fund of Funds are more stringent. FoF can be classified as an equity-oriented fund if it invests at least 90% in Exchange Traded Funds (ETFs), which further invests at least 90% in shares of Indian companies listed on stock exchanges.
For taxation purposes, all other FoFs are considered 'other than equity-oriented’ schemes even if they invest 100% of their net assets in another equity fund.
Here is a summary of taxation rules for mutual fund schemes:
|
Classification of FoF |
Holding Period |
Capital Gain |
Tax Rate |
|
Equity-oriented fund |
Less than 12 months |
Short Term Capital Gain (STCG) |
15% |
|
12 months or more |
Long Term Capital Gain (LTCG) |
10% after an exemption of Rs. 1 lakh in a year for aggregate LTCG from equities |
|
|
Other than equity-oriented fund |
Less than 36 months |
STCG |
Regular tax rates |
|
36 months or more |
LTCG |
20% with indexation |
Data in respect Fund of Funds Domestic is shown for information only. The same is included in the respective underlying schemes.
The tax provisions mentioned in the article are for illustrative purposes only and updated as per the Union Budget presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale.
