Hybrid Mutual Funds Taxation: Rules, Rates And How It Impacts You In 2025
Hybrid mutual funds combine the best of both worlds – equity for growth and debt for stability. But when it comes to taxation, even a small change in asset allocation can make a big difference to your final returns.
For example, if a hybrid fund holds 65% equity, it qualifies as equity oriented and enjoys more favorable tax treatment. But if that allocation drops to 64 percent, it is taxed like a debt fund, which could mean paying significantly more tax on the same returns.
In this article, let us dive into the taxation of hybrid mutual funds and understand how it affects your actual returns in 2025.
What Are Hybrid Mutual Funds?
Hybrid mutual funds are investment vehicles that blend different asset classes like equity and debt, in varying proportions. Think of them as the perfect middle ground for investors who find pure equity too risky and pure debt too conservative.
These funds have various categories:
- Aggressive hybrid funds (65-80% equity)
- Balanced hybrid funds (40-60% equity)
- Conservative hybrid funds (10-25% equity)
- Multi-asset allocation funds (equity, debt, gold, etc.)
Understanding the taxation rules for each category is essential because a small shift in allocation could lead to a significant change in how your returns are taxed.
Taxation Rules For Hybrid Mutual Funds In India (2025)
The taxation of hybrid mutual funds in India follows a simple principle; the higher the equity component, the more favourable the tax treatment. Let us understand it in detail.
1. Equity-Oriented Hybrid Fund Taxation
Any hybrid mutual fund with at least 65% of its assets in domestic equity is classified as equity-oriented for tax purposes. For these funds in 2025:
- Short-term capital gains (STCG) for holdings less than 12 months: Taxed at a flat 20%
- Long-term capital gains (LTCG) for holdings more than 12 months: Tax-free up to INR 1.25 lakh per financial year, beyond which taxed at 12.50% without indexation
2. Debt-Oriented Hybrid Fund Taxation
Any hybrid mutual fund with less than 65% in equity is classified as debt-oriented. From FY2024, debt hybrid mutual fund taxation has changed, and any gains are considered at par with debt funds and are treated as per an individual’s respective tax slab rate.
However, if the units are purchased before 1st April 2023, and are held for 24 months, 12.50% LTCG is applicable1. Any purchase after this enjoys no benefits and is added to an individual’s total income and treated as per the slab rate.
3. Taxation On Capital Gains: STCG vs LTCG
STCG vs LTCG hybrid funds taxation can significantly impact your returns.
Let us break it down with an example:
Raj invested INR 10 lakh in a hybrid fund (70% equity) and earned returns of 12% after 2 years. His gain of INR 2.54 lakh would be considered long-term since he held it for less than 12 months.
His LTCG at 12.50% will be:
- Total gain: INR 2.54 lakh (INR 12.54 lakh - INR 10 lakh)
- Taxable gain: INR 2.54 lakh - INR 1.25 lakh (Tax free) = INR 1.29 lakh
- Tax payable: INR 1.29 lakh × 12.50% = INR 16,125
If he had sold it within 12 months of investment, the gains of INR 1.20 lakh would be taxed at 20%, which would be INR 24,000.
It shows that there is a huge difference in effective returns just by holding funds for more than a year in the case of equity-based hybrid funds.
Read: Best Mutual Funds To Invest In 2025 For High Returns And Low Risk
Impact Of Holding Period And Asset Allocation
| Fund Type | Equity % | STCG Period | LTCG Period | STCG Rate | LTCG Rate |
| Aggressive Hybrid | 65-80% | <12 months | >12 months | 20% | 12.50% (after INR 1.25 lakh exemption) |
| Balanced Hybrid | 40-60% | <24 | >24 | As per the slab | 12.50% without indexation if purchased before 1st April 2023 |
| Conservative Hybrid | 10-25% | <24 | >24 | As per the slab | 12.50% without indexation if purchased before 1st April 2023 |
This table reveals why taxation on hybrid funds India is such an important consideration when selecting the right fund for your needs.
Why Taxation Of Hybrid Funds Matters
Tax Efficiency vs Returns
When evaluating hybrid funds, looking at just the pre-tax returns can be misleading. A fund with higher pre-tax returns might actually deliver lower post-tax returns due to unfavourable taxation.
This is particularly true as, after 1st April 2023, the tax treatment and holding period for equity-oriented and debt-oriented hybrid funds have changed drastically, as we covered in this article.
Equity-oriented hybrid funds are more tax-efficient, and due to their market-linked features, they also deliver competitive returns compared to debt-oriented hybrid funds.
How It Compares To Pure Equity And Debt Funds
Hybrid mutual fund returns and tax implications create a unique position compared to pure equity or debt funds:
Fund Type | LTCG Tax Rates | Holding Period |
Pure Equity Funds | 12.5% after INR 1.25L exemption | >12 months |
Hybrid (Equity- Oriented) | 12.5% after INR 1.25L exemption | >12 months |
Hybrid (Debt- Oriented) | As per slab or 12.5% (if bought before April 1 2023) | >24 months (for 12.5%) |
Pure Debt Funds | As per slab or 12.5% (if bought before April 1 2023) | >24 months (for 12.5%) |
The key advantage of equity-oriented hybrid funds is that they provide some debt exposure while maintaining the favourable tax treatment of equity funds.
How To Calculate Tax On Hybrid Mutual Fund Returns
Calculating tax on mutual fund redemption India for hybrid funds requires these steps:
1. Identify the fund classification: The first step is to determine whether your hybrid fund is equity-oriented or debt-oriented. This classification is crucial because it determines the holding period requirements and applicable tax rates.
2. Determine your holding period: Based on the fund type, check if your investment qualifies as short-term or long-term:
3. Calculate your capital gains: The formula for calculating capital gains is:
Capital Gains = Redemption Amount - Cost of Acquisition. The cost of acquisition is simply what you paid.
4. Apply the appropriate tax rate: Now, apply the tax rate based on fund type and holding period, and you are done!
Read: Limitations Of Tax Planning In India: Key Pitfalls To Avoid
Smart Tax Planning With Hybrid Mutual Funds
Choosing The Right Fund For Your Tax Slab
Hybrid mutual fund tax implications vary significantly based on your income tax slab:
1. For investors in the 30% tax bracket: Equity-oriented hybrid funds are significantly more tax-efficient. You will pay only 20% on short-term gains versus 30% for debt-oriented funds, plus enjoy the INR 1.25 lakh exemption on long-term gains.
2. For investors in the 20% tax bracket: The advantage narrows but still tilts toward equity-oriented funds, especially for long-term investments where the INR 1.25 lakh exemption provides substantial benefits.
3. For investors in the 10% tax bracket: The difference is less pronounced. Debt-oriented hybrid funds with higher yields become more attractive, as their short-term gains are taxed at just 10% versus the flat 20% for equity-oriented funds.
The key is to compare post-tax returns rather than pre-tax returns when selecting funds. Also, instead of just focusing on taxation, you should also pay attention to your overall financial goals.
SIPs And Taxation: What To Keep In Mind
- Each instalment has its own holding period: Every SIP instalment is treated as a separate investment with its own purchase date. When you redeem, each unit’s holding period is calculated separately.
- FIFO method applies by default: Most fund houses follow the First In First Out method for redemptions, meaning your oldest units are redeemed first2.
- Partial redemptions can be optimised: If you need only part of your investment, redeem units that have completed the long-term holding period to benefit from lower tax rates.
Conclusion
Taxes can quietly erode your investment gains, especially with hybrid mutual funds where even a 1% change in asset allocation can shift how your returns are taxed. In 2025, knowing whether your fund is equity or debt-oriented is not just a detail, it directly affects what you take home.
Smart investing is not just about chasing returns but also about understanding what impacts them after tax. By factoring in holding periods, tax slabs, and asset mix, you can make more informed and efficient investment choices.
Looking for tax-efficient investment opportunities? Login to Grip Invest and explore fixed income products curated to help you grow your wealth smarter.
FAQs On Hybrid Mutual Funds
1. Are hybrid funds eligible for the indexation benefit?
No, hybrid funds, including debt-oriented hybrid mutual funds are no longer eligible for indexation benefits.
2. What happens if asset allocation changes after investment?
The mutual fund tax rules 2025 specify that classification is based on the fund’s mandate and average allocation, not point-in-time allocation. Temporary fluctuations due to market movements do not change the tax treatment. However, if a fund permanently changes its allocation strategy, its tax classification could change going forward.
3. Which type of mutual fund is exempt from income tax?
No mutual fund is completely exempt from capital gains tax mutual funds in 2025. However, equity and equity-oriented hybrid funds offer tax benefits of up to INR 1.25 lakh LTCG per financial year.
4. Is tax deducted at source (TDS) on hybrid mutual fund redemptions?
No, TDS is not applicable on hybrid mutual fund redemptions for resident Indians. However, you are required to declare these gains in your income tax return and pay the applicable tax. For NRIs, TDS provisions may apply depending on specific circumstances and DTAA benefits.
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