Equity-oriented fund
Also written Equity oriented mutual fund · EOF
A fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
In plain language
Two investors each make Rs 3,00,000 of gain on a mutual fund held for two years. One pays Rs 21,875 of tax. The other pays tax at his slab rate — possibly Rs 90,000. The only thing that separates them is whether the scheme met the definition of an equity oriented fund.
This is not a marketing label and it is not the SEBI scheme category. It is a definition inside the Income Tax Act, and the workbook states it precisely: a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10, which satisfies a minimum equity test.
How it works
The 65% test. In the ordinary case, a minimum of 65% of the total proceeds of the fund must be invested in the equity shares of domestic companies listed on a recognised stock exchange.
The fund-of-funds route. Where the fund invests in units of another fund that is itself traded on a recognised exchange, at least 90% of the first fund's proceeds must sit in units of that other fund, and that other fund must itself hold at least 90% in listed domestic equity shares.
How the percentage is measured. Not on one date. The workbook is explicit: the percentage is computed with reference to the annual average of the monthly averages of the opening and closing figures. A fund cannot dress the portfolio up on 31 March and qualify.
ULIPs are inside the definition too. Up to FY 2024-25 the definition took in unit-linked policies of an insurance company to which the exemption under section 10(10D) does not apply because of the fourth and fifth provisos — the high premium ULIPs. From FY 2025-26 (amendment by the Finance Act, 2025) it takes in any ULIP to which the section 10(10D) exemption does not apply. For high premium ULIPs the equity requirement must be satisfied throughout the term of the policy, not merely on average for a year.
What qualifying buys you. Units are a long-term capital asset after 12 months. Long-term gains where STT is paid on transfer are exempt up to Rs 1,25,000 a year and taxed at 12.5% above that, under section 112A. Short-term gains on an STT-paid transfer are taxed at 20% under section 111A. Dividends are taxable at the unit holder's slab rate, with interest expenditure deductible only up to 20% of the dividend.
A worked example
Mrs Kulkarni redeems two holdings in August 2024, each held for three years, each showing a gain of Rs 3,00,000. STT is paid on both.
| Scheme A — equity oriented (68% listed domestic equity) | Scheme B — a debt scheme bought in 2021 | |
|---|---|---|
| Long-term gain | Rs 3,00,000 | Rs 3,00,000 |
| Annual exemption | (Rs 1,25,000) | Nil |
| Taxable | Rs 1,75,000 | Rs 3,00,000 |
| Rate | 12.5% | 12.5% (other mutual fund, listed) |
| Tax | Rs 21,875 | Rs 37,500 |
Now suppose Scheme A had drifted. Its monthly averages over the year worked out to 62% in listed domestic equity, not 65%. It is then not an equity oriented fund for the year, the Rs 1,25,000 exemption is gone, and the same Rs 3,00,000 gain carries Rs 37,500 of tax — Rs 15,625 more, with nothing changed in the investor's own conduct.
And if the units had been redeemed at 11 months instead: as an equity oriented fund the gain would be short-term at 20%, or Rs 60,000. The 12-month line is worth Rs 38,125 on this single holding.
Why NISM asks about it
Chapter 11 (Taxation of Equity Products), section 11.6, opens by defining the term before any rate is discussed — because every rate in the chapter hangs off it. Expect questions that give you a portfolio composition and ask whether the scheme qualifies, questions on the 90%/90% fund-of-funds test, and computation questions that hand you a gain and a holding period and expect you to apply Rs 1,25,000 and 12.5%. Chapter 10 covers the schemes that fail this test.
Common exam traps
- 65% in listed domestic equity. Foreign shares and unlisted shares do not count towards the test, however equity-like they feel.
- The test is an annual average of monthly averages of opening and closing figures, not a year-end snapshot. This exact phrase is examinable.
- The fund-of-funds test is 90%, not 65% — and it applies at both levels.
- A SEBI "equity scheme" is not automatically an equity oriented fund for tax. Arbitrage and hybrid schemes are the usual casualties.
- Rs 1,25,000 is a per-year exemption across all 112A gains, not a per-scheme or per-transaction one.
- STT on transfer is the condition, not STT on acquisition. The workbook carves out IFSC exchange transfers in foreign currency from the STT condition.
Check yourself
1.For transfers on or after 23 July 2024, at what rate are long-term capital gains taxed across all categories of assets?
- a)10 per cent
- b)12.5 per cent
- c)20 per cent
- d)At the assessee's slab rates
Show the answer
Answer: (b) 12.5 per cent
Long term capital gains will be taxed at the rate of 12.5% in respect of ALL CATEGORIES OF ASSETS. For listed equity shares, equity oriented fund units, equity oriented high premium ULIPs and business trust units where the transaction has suffered STT, gains exceeding Rs 1,25,000 are taxed at that rate. The single 12.5 per cent rate across asset classes is the great simplification of the Finance Act 2024.
Where this is taught
- Series V-B · Chapter 8: Mutual fund Taxationintroduced here
- Series X-B · Chapter 10: Taxation of Debt Productsintroduced here
- Series V-D · Chapter 8: Taxationintroduced here
- Series V-A · Chapter 8: Taxationintroduced here
- Series X-B · Chapter 11: Taxation of Equity Products
Related terms
- Securities Transaction TaxA central government tax collected by the exchange on the sell side of every futures and option trade — 0.05% of futures traded value, 0.15% of option premium, and 0.15% of settlement price on exercise.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Equity Linked Saving SchemeAn equity mutual fund category that carries a section 80C deduction of up to Rs 1.5 lakh with a compulsory three-year lock-in — the shortest lock-in of any tax-saving instrument.
- Exchange Traded FundA mutual fund scheme whose units are listed and traded on a stock exchange like a share, so you transact at live prices through the day instead of at one end-of-day NAV.
- Specified Mutual FundA mutual fund caught by section 50AA — gains on it are short-term no matter how long it was held, and are taxed at the investor's slab rate.
- Marginal reliefRelief that caps the tax on income just above the section 87A rebate threshold at the amount by which the income exceeds that threshold — so one extra rupee of income never costs more than a rupee of tax.
- Systematic Withdrawal PlanA standing instruction to redeem a set amount — or only the appreciation — from a mutual fund scheme at a chosen frequency, used to manufacture a regular income in retirement.
- Market Linked DebentureA debenture whose return is linked to an underlying index or security rather than being a fixed coupon; since Section 50AA its gains are short-term capital gains taxed at slab, whatever the holding period.