How To File Income Tax Returns for Mutual Funds?

Mutual funds generate two types of income, i.e., dividends and capital gains, each taxed differently based on the fund type and holding period. Referring to broker statements, and reconciling the same with Annual Information Statement (AIS) and Form 26AS, will ensure accurate ITR filing for income from mutual funds.

ITR Filing for Mutual Funds Income - Key Points to Remember

• Keep your PAN, Aadhaar, Form 26AS, Form 16, AIS, TIS, and capital gain statements handy while filing ITR.
• While dividends from mutual funds can be reported in ITR-1, capital gains on mutual funds requires ITR-2 reporting, exceptions apply.
• Mutual fund dividends must be shown under ‘Income from Other Sources’.

Tax on Mutual Funds Income

• There are two types of returns that you can earn if you invest in mutual funds - 
  • Dividends and 
  • Capital Gains.
• 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 holding period and type of mutual fund affect the tax rate on capital gain from mutual funds. 
• Mutual funds are broadly classified into two categories under the income tax act:
  • Equity Oriented Mutual Fund
  • Non- Equity Oriented Mutual Fund. 
• A snippet of capital gain tax rates for mutual funds are presented below:

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. 
• These fund are taxed under special provisions , section 111A and 112A.
• The following table shows the taxation of equity-oriented mutual funds.

Note: The above tax rates apply to equity-oriented mutual funds where Securities Transaction Tax (STT) has been paid.

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. 

Important note: Tax at 12.5% on LTCG applies without indexation benefit, subject to the provisions applicable for the relevant assessment year and asset category.

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

Taxation of Debt Mutual Funds

Under Section 50AA of the Income Tax Act, 1961, specified mutual funds purchased on or after 01st April, 2023 are taxed as short-term capital gains, irrespective of holding period. Specified mutual funds are those which invest more than 65% of its proceeds in debt funds, securities, or any other form of debt. 

In simple words, debt mutual funds purchased on or after 01st April, 2023 are taxed as short term capital gains irrespective of holding period. 

Debt funds purchased up to 31st March, 2023 are taxed as normal mutual funds, whose taxation as short-term or long-term depending on period of holding. 

Set-Off of Capital Losses against Capital Gains

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.

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.

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). If you have oly long term capital gains under section 112A within Rs. 1.25 lakhs, you can file under ITR 1.

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.

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

1. Visit the Income Tax Department's official website and log in using your credentials.
2. Choose the option 'e-file', and then click 'Income Tax Returns'. Click on 'File Income Tax Returns'.
3. Select the assessment year, status, and type of form. Choose 'taxable income is more than exemption limit' as the reason.
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.
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'.

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

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.

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?

• 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. 

Foreign Mutual Fund Investments - Disclosures

• If you are an Indian Resident, having mutual fund investments abroad, irrespective of whether it generates income or not, disclosure needs to be made in Schedule Foreign Assets (Schedule FA).
• If such mutual funds generate income, like dividend or capital gains, such income needs to be reported under Schedule Foreign Source Income (Schedule FSI) as well.
• However, the period of reference for these disclosures would be the calendar year overlapping the financial year, not the relevant financial year itself. For example, If you are filing ITR for FY 2025-26, your foreign mutual fund income and holdings for calendar year 2025, (1-1-2025 to 31-12-2025) needs to be reported.

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.