Multi-asset allocation fund claims equity-like taxation with just 35% equity. Is it possible?

A multi-asset allocation fund can qualify for equity-like taxation of long-term capital gains (LTCG) if it allocates a minimum 65% of its assets in equity. As they chase multiple assets, they may sometimes fail to maintain the 65% equity-allocation. What happens in that situation? Do they lose the equity taxation benefit? Today's Q&A answers these in response to a reader's query.

The manner of calculation of allocation of different asset classes is prescribed under the Income Tax Act, 1961, as it is relevant for taxation purposes. The taxation differs based on the ultimate allocation of different assets in the scheme.

For a multi-asset allocation fund to be eligible for equity-like taxation, it needs to have a minimum of 65% investment in equity shares of domestic companies listed in India.

The above percentage is not required to be held on an ongoing basis, but is computed on the basis of the annual average for all monthly averages of opening and closing holdings. So first, the monthly averages of opening and closing holding is computed, and then the average of all 12 months is computed to determine whether the required 65% of investments in listed shares is maintained or not during the year.

Please note that the long-term capital gains tax rate of 12.50% applies to long-term capital gains of all kinds. But if the long-term capital gains arise from equity shares listed in India or such equity-oriented schemes on which Securities Transaction Tax (STT) has been paid, the long-term capital gains up to ₹1.25 lakhs come tax-free every year. The limit of ₹1.25 lakh is to be computed with reference to the aggregate of long-term capital gains on all such equity products.