What is a Dynamic Asset Allocation Fund?
A Dynamic Asset Allocation Fund (DAAF), or Balanced Advantage Fund (BAF), is a type of hybrid mutual fund that flexibly shifts its investment between stocks and bonds, depending on market conditions. Fund managers dynamically adjust this mix—say, increasing equity in a falling market and shifting toward debt when valuations are high.
How Are These Funds Taxed?
Based on Equity Allocation – The 65% Rule
Equity-Oriented Classification (≥ 65% equity):
These funds follow the tax rules of equity funds.
Short-Term Capital Gains (holding < 12 months): Taxed at 20%
Long-Term Capital Gains (holding ≥ 12 months): Tax-free up to ₹1.25 lakh; gains above that taxed at 12.5%.
Non-Equity Classification (< 65% equity):
Treated as a debt fund—gains are taxed at your individual income tax slab rate, regardless of how long you hold them.
If You Hold the Fund for More Than 2 Years
The tax outcome still depends on the fund’s classification at the time of redemption.
1. Equity-Oriented Funds (≥ 65% equity)
Taxed under equity rules—even beyond two years:
LT Capital Gains (≥ 12 months): 12.5% over ₹1.25 lakh
ST Capital Gains (< 12 months): 20%
So holding for more than two years doesn’t change the tax benefits—they follow the same equity fund rules.
2. Non-Equity (Debt) Classification
Held beyond 24 months (i.e., over two years):
- Pre–April 1, 2023 acquisitions: Eligible for long-term capital gains (LTCG) taxed at 12.5% with indexation
- Post–April 1, 2023 acquisitions: Taxed at your income tax slab, no indexation benefit—even if held for years
Quick Summary Table
| Fund Type | Holding Period | Tax Treatment |
|---|---|---|
| Equity-oriented (≥ 65%) | ≥ 12 months (e.g., 2+ yrs) | LTCG taxed at 12.5% above ₹1.25 lakh; no indexation |
| Equity-oriented | < 12 months | STCG taxed at 20% |
| Non-equity (< 65%), bought before April 1, 2023 | > 24 months | LTCG taxed at 12.5%, with indexation |
| Non-equity (< 65%), bought on or after April 1, 2023 | Any duration | Taxed as per income tax slab, no indexation |
Important Things to Remember
DAAFs can flip between equity and debt classifications depending on 12-month-average equity exposure—always check the AMC’s latest data.
Income Tax Exemption Update: The LTCG exemption rose from ₹1 lakh to ₹1.25 lakh, and the LTCG rate increased from 10% to 12.5%, effective July 23, 2024.
Debt funds acquired on/after April 1, 2023 now have long-term gains taxed at slab rate, with no indexation, even after holding for years.
Final Thoughts
If you’re holding a DAAF for over two years, your tax depends on whether it’s classified as equity or debt at redemption:
- If equity-oriented → Enjoy equity LTCG benefits (12.5% above ₹1.25 lakh)
- If non-equity (debt) and acquired before April 2023 → 12.5% with indexation (long-term)
- If non-equity and acquired after April 2023 → Taxed at your income slab, regardless of holding period
Always confirm the fund’s average equity exposure from your AMC and consult a tax advisor for clarity.