Conservative hybrid funds have gained attention among investors seeking moderate returns with lower risk. Recent changes in tax laws and budget announcements have altered how these funds are treated, raising
questions about eligibility for rebates under Section 87A. Many investors are now keen to understand how their income from these funds affects their tax liability.
With the financial year 2025-26 underway, the classification of hybrid funds, particularly conservative ones, has become important. Investors often combine income from rent, fixed deposits, and mutual fund gains, and knowing whether these gains attract tax or allow rebates can significantly impact financial planning.
Conservative Hybrid Funds Explained
Conservative hybrid funds invest primarily in debt instruments, with a small portion in equities.
According to Securities and Exchange Board of India (SEBI) guidelines, these funds allocate 10-25 per cent of assets to equity, while 75-90 per cent goes to debt and money market instruments.
Since the debt portion exceeds 65 per cent, any gains from these funds are taxed as short-term capital gains at the investor’s slab rate, regardless of how long the units are held.
Section 87A Rebate Eligibility
The tax rebate under Section 87A of the new regime is applicable if taxable income at the slab rate does not exceed Rs 12 lakh. Since gains from conservative hybrid funds are treated as normal income, they are counted toward this limit.
For example, if an investor earns Rs 8 lakh from rent and fixed deposits, and Rs 80,000 from a conservative hybrid fund, the total taxable income becomes Rs 8.8 lakh.
In this case, the individual would still qualify for the Section 87A rebate, meaning no tax would be payable.
Budget Impact On Hybrid Funds
Budget 2023 initially classified mutual fund schemes with less than 35 per cent equity as debt funds, taxing their gains at the slab rate.
Budget 2024 refined this rule, confirming that schemes with 65 per cent or more in debt instruments would be taxed at the slab rate. This ensures clarity for conservative hybrid funds for FY2025–26 onward.
Understanding these rules helps investors plan their finances efficiently. Conservative hybrid funds continue to offer a balance of moderate returns and lower risk, and when combined with Section 87A benefits, they can be an effective tool for tax-efficient investment.
