How To File Income Tax Returns for Mutual Funds?

When you are investing in mutual funds or plan to do so in the future, it is important to know how you can file income tax returns for capital gains earned from mutual funds. Knowledge of mutual fund taxation can help you with efficient financial planning.

Tax on Mutual Funds

There are two types of returns that you can earn if you invest in mutual funds - dividends and capital gains. The returns generated from investing in mutual funds upon redemption of fund units are referred to as capital gains. 

The holding period and type of mutual fund affect the tax rate on capital gain from mutual funds. Income tax has two broad categories of mutual funds.

Equity Oriented Mutual fund

Mutual funds are classified as equity-oriented mutual funds when they have exposure of at least 65% of their portfolio towards Indian-listed equity shares. If the holding period of such a fund is less than one year, then it will be considered a short-term capital gain, and tax @ 20% will be calculated. If the holding period is more than one year, then it will be considered a long-term capital gain, and tax @ 12.5% will be calculated. You will also get exemption up to Rs 125,000 on long-term capital gain, and tax @ 12.5% will be computed only on gains above Rs 1.25 lakhs

Examples of Equity Oriented mutual funds are index funds, Tax saver funds, Flexi cap funds, large and mid-cap funds, etc

Non-equity Oriented Mutual fund

Mutual funds are classified as non-equity-oriented mutual funds when they have exposure of less than 65% in Indian listed equity shares. If the holding period was less than 24 months then it is considered as short-term capital gain, and tax @ slab rate was applied, and if the holding period is more than 24 months years, then tax @ 12.5% will be computed as long-term capital gains.

Examples of non-equity-oriented mutual funds are liquid Mutual funds, Low Duration Funds, Gold Funds, US Opportunity Funds etc.

Summary as follows:

In Finance Act 2023 changes were made in respect of non-equity funds taxation. Any non-equity funds purchased after 1st April 2023 and subsequently sold will be considered Short-term irrespective of their holding period and will be taxed at respective slab rates.

It is also important to note that for any non-equity funds bought before 31st Mar 2023, old provisions of long-term and short-term will continue to be applicable

Documents Required for Filing ITR

Documents required for filing ITR differ depending on the taxpayer's income source. However, there are certain documents that every taxpayer needs while filing returns. Here are the documents required while filing the income tax return for capital gains and dividends: 

• PAN card and the linked Aadhaar card
• Form 26AS (contains details regarding taxes deducted and deposited with the tax department)
• Form 16 (consists of details of salary and amount of TDS deducted)
• Bank account details
• Salary slips (in case you are a salaried person)
• Tax saving investment proofs (for claiming deduction under section 80C)
• Proof of capital gains (purchase or sale deed of property or capital gain statements from mutual fund houses)
• Dividend income statements
• Profit and Loss Statement for shares bought and sold
• Annual Information Statement (AIS)
• Taxpayer Information Summary (TIS)

Some other important documents that might be essential while filing an ITR are health insurance premium receipts, interest certificates from banks or post offices, home loan payment receipts, etc.

Reconciliation of Capital Gain statement vs AIS

As part of its digital initiative, the Income tax department has started receiving the details on the sale of your Mutual funds directly from RTA like CAMs and Kfintech. Such data is reflected in your AIS - Annual Information Statement.

Thus, it is important to reconcile the capital gain statement with the data available in AIS before you file your ITR. Any Mismatch in ITR and AIS will result in a notice from the Income tax department.

How to File ITR for Capital Gains and Losses?

In case you have earned any capital gains or losses during a financial year, you need to report that by filing ITR form 2 or 3 (if you are not eligible to file ITR 2). 

Gains from mutual funds are taxed only in the financial year when the units are redeemed. Anyone who earns through capital gains during a financial year needs to submit ITR 2 while filing the income tax return. Individuals who earn their income from business or profession need to file ITR 3. 

Capital gains or losses denote the difference between the price at which you purchased the units of mutual funds and the value at which they are sold. If your sale price exceeds your purchase price, it is capital gain. However, if the units are sold at a lower price than your purchase price, then it is a capital loss. 

The Income Tax Act permits a taxpayer to adjust losses with taxable profits. Long-term capital losses can only be set off against long-term capital gains. In the case of short-term losses, you can set them off against long-term and short-term losses.

Now that you are aware of which form to file, let us learn how to show capital gain in ITR:

Step 1: Visit the Income Tax Department's official website and log in using your credentials.

Step 2: Choose the option 'e-file', and then click 'Income Tax Returns'. Click on 'File Income Tax Returns'.

Step 3: Select the assessment year, status, and type of form. Choose 'taxable income is more than exemption limit' as the reason.

Step 4: Select 'General' and then 'Income Schedule' on the next page. After that, select 'Schedule Capital Gains' and the type of capital assets from the provided list.

Step 5: There are two types of capital gains: short-term and long-term capital gains. To report STCG, click 'Add details' and mention the consolidated amount you obtained from the sale of short-term assets and the Cost of Acquisition in that particular financial year.

In the case of long-term capital gains, you need to provide scrip-wise details. After including all the details in 'Schedule 112A', click 'Add'.

Step 6: After confirming all the necessary schedules, review Part B TT1 and click 'Preview Return'. Download the ITR and proceed with the declaration.

Step 7: You must provide specific details and click 'Proceed to Validation' in the declaration tab. After validation, you need to file ITR and e verify the ITR electronically.

It will take at most 120 days for processing to be completed after filing ITR

Capital Gains ITR Form

Taxation of your capital gains usually depends on whether they are long-term or short-term capital gains. According to the present mutual fund taxation rules, returns from every kind of mutual fund are bifurcated into short-term capital assets and long-term capital assets as per the holding period of the units. Selecting a relevant schedule for reporting capital gains in ITR form is of utmost importance. 

In case of short-term capital gains, you need to report it in Schedule CG of the ITR form. Whereas in case of long-term capital gains exceeding Rs. 1.25 lakh, you need to report it in Schedule 112A. When specifying the type of capital assets sold by you, choose equity shares or bonds and debentures accordingly.

Where to Show Mutual Fund Investment in ITR 1?

In general, if you are a salaried individual with no income above Rs. 50 lakh and usually files ITR-1, a question might arise regarding where to show mutual fund investment in ITR 1. Only individuals with capital gains income under section 112A not exceeding Rs. 1.25 lakhs and with no brought forward or carry forward of losses can disclose such capital gains income in ITR-1. 

How to Show Mutual Fund Dividend in ITR?

To completely understand how to show mutual fund investment in ITR, you must learn how to disclose dividend income in ITR. You must disclose your dividend income in 'Schedule of Other Sources'. Dividend income needs to be reported every quarter in the ITR form. Mutual fund houses will deduct TDS u/s 194K @ 10% when the dividend exceeds Rs 10,000. Such TDS amount will be reflected in your Form 26AS which can be claimed as Tax credit at the time of filing your ITR. The steps have already been discussed above regarding capital gains and losses. 

Final Word

Now that you know how to show mutual fund investment in ITR, you can submit the applicable ITR without any hassle. One important point you need to remember is to e-verify your ITR within 30 days from the date of filing your tax return, as without it, the ITR filing process remains incomplete. Failure to e-verify your ITR will mean that your ITR has not been filed and your ITR will be invalid.