Taxation of Fund of Funds (revised 2024)

Taxation of Fund of Funds (FoFs) in India was revised by the Finance Act 2024, effective 23 July 2024, to create a favourable classification for domestic equity FoFs that invest predominantly in equity-oriented domestic mutual funds. Under the pre-2024 framework, all FoFs – regardless of whether they invested in equity or debt underlying funds – were classified as non-equity and taxed either under Section 112 (LTCG with indexation, pre-April 2023) or as specified mutual funds at slab rate (post-April 2023, per Finance Act 2023). The Finance Act 2024 introduced a new sub-category: a domestic equity FoF that invests at least 90% of its assets in equity-oriented domestic mutual funds now qualifies as equity-oriented and is taxed under Sections 111A and 112A like a direct equity mutual fund.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

What is a Fund of Funds

A Fund of Funds (FoF) is a mutual fund scheme that invests in units of other mutual fund schemes rather than directly in securities. SEBI’s categorisation circular (October 2017) permits AMCs to offer FoFs across:

• Domestic FoFs: Investing in other domestic Indian mutual fund schemes.
• Overseas FoFs / international FoFs: Investing in foreign mutual funds or ETFs.
• Gold FoFs: Investing in gold ETFs.
• Multi-manager FoFs: Investing in multiple domestic equity or debt funds.

FoFs incur a double-layer of expense ratios: the FoF’s own management fee plus the expense ratios of the underlying funds. SEBI restricts total TER for FoFs.

Pre-2024 FoF taxation

Before the Finance Act 2024, all FoFs in India were treated as non-equity for tax purposes, regardless of their underlying investments:

• FoFs did not directly hold equity shares of domestic companies.
• For the 65% equity test under Section 112A(10), the underlying fund’s equity holdings were not “looked through” to the FoF.
• Therefore, FoFs failed the equity-oriented test.

From 1 April 2023 (Finance Act 2023), units of FoFs acquired after that date were treated as specified mutual funds:

• All gains taxed as STCG at slab rate, regardless of holding period.
• No indexation, no LTCG rate.

For units acquired before 1 April 2023 and held for more than 36 months, LTCG at 20% with indexation was available.

The Finance Act 2024 amendment

The Finance Act 2024 revised the Section 112A(10) definition (and related provisions) to include a new category: a domestic FoF that invests at least 90% of its total proceeds in the units of equity-oriented funds qualifies as equity-oriented. The amendment is effective for units acquired on or after 23 July 2024 (the date of Presidential assent).

Key conditions for equity-oriented FoF status:

1. At least 90% of the FoF’s total proceeds must be in units of equity-oriented domestic mutual fund schemes (not overseas equity funds, not gold ETFs).
2. Each underlying fund must itself satisfy the 65% equity criterion.
3. The FoF must be registered under SEBI (Mutual Funds) Regulations 1996.

When these conditions are met, the FoF is treated as equity-oriented and its investors receive:

• STCG at 20% under Section 111A (held 12 months or less).
• LTCG at 12.5% under Section 112A, above Rs 1,25,000 (held more than 12 months).
• Grandfathering under Section 55(2)(ac) for units acquired before 1 February 2018 (unlikely for FoFs, given the amendment is recent, but applicable in theory).

Comparison: domestic equity FoF vs direct equity MF (post-23 July 2024)

The tax treatment is now identical; the practical difference is the higher expense ratio for the FoF.

FoFs that remain specified MFs

FoFs that do not meet the 90% domestic equity threshold remain specified mutual funds:

See international MF taxation in India and gold ETF taxation for those specific categories.

Units acquired before 23 July 2024

The Finance Act 2024 amendment on FoF classification applies to units acquired on or after 23 July 2024. For FoF units acquired before that date:

• Post-April 2023, pre-23-July-2024 units: slab rate (specified MF per Finance Act 2023).
• Pre-April 2023 units: old LTCG regime (20% with indexation after 36 months, if applicable).

NRI investors in FoFs

NRI investors in FoFs are subject to Section 195 TDS at the applicable rate: 20% STCG TDS or 12.5% LTCG TDS for equity-oriented FoFs; 30% for non-equity specified MF FoFs. DTAA relief may be available.

Reporting

FoF capital gains are reported in Schedule CG of ITR-2 or ITR-3. Equity-oriented FoF gains from 23 July 2024 onwards are reported under Section 111A (STCG) or Section 112A (LTCG). Gains on non-equity FoF units are reported as STCG on other assets. Reconciliation with Annual Information Statement data is recommended.

See also

• Equity mutual fund taxation in India
• Debt mutual fund taxation (post-April 2023)
• International MF taxation in India
• Gold and silver ETF taxation
• LTCG on equity MFs (Section 112A)
• TDS on MF redemption for NRIs (Section 195)
• Capital gains tax in India
• Section 112A
• ITR-2

References

1. Income Tax Act 1961, Section 112A(10) (as amended by Finance Act 2024) – equity-oriented fund definition including FoFs.
2. Finance Act 2024 – clauses amending FoF classification effective 23 July 2024.
3. Finance Act 2023 – specified mutual fund provisions.
4. SEBI Circular on Categorisation and Rationalisation of Mutual Fund Schemes (October 2017) – FoF category.
5. Income Tax Act 1961, Section 111A – STCG rate.
6. Income Tax Act 1961, Section 195 – TDS for NRIs.
7. Memorandum Explaining the Provisions of Finance Bill 2024 (Ministry of Finance).