The taxation rules only recognize equity funds and non-equity funds. If the proportion of equity is more than 65% then the balanced fund is an equity fund otherwise it is a debt fund for tax purposes. There is no separate tax rule for balanced fund, other than using the portfolio mix to determine if the fund is equity oriented or debt oriented. Income Tax rules clearly define how this proportion of equity and debt should be calculated and what the time period under consideration is.

Typically, equity oriented balanced funds and arbitrage funds qualify as equity funds for tax purposes as they are predominantly invested in equity beyond 65%. However, the typical monthly income plans (MIP) schemes will classify as debt funds or non-equity funds for the purpose of taxation. An interesting note here needs to be remembered. Even if fund of funds (FOF) are created by combining equity funds, these FOFs will still be treated as non-equity funds for the purpose of taxation. That is one of the reasons these FOFs have not taken off in a big way in India.