How To Declare Mutual Fund Investments in ITR and Disclose Capital Gains

Mutual funds have emerged as a popular investment avenue, offering individuals a hassle-free way to diversify their portfolios across stocks, bonds, and other assets. Whether you’re a seasoned investor or just dipping your toes into the world of mutual funds, understanding how to declare your investments and disclose capital gains accurately in your Income Tax Return (ITR) is crucial.

In this blog, we will take you through the essential steps and considerations involved in declaring mutual fund investments in your tax return. 

A Step-by-Step Process for Filing ITR with Capital Gains and Losses

• Visit the official website of the Income Tax Department and log in using your credentials.

• Select the ‘e-file’ option, then click on ‘Income Tax Returns’ and choose ‘File Income Tax Returns’.

• Specify the assessment year, your status, and the appropriate ITR form. If you are ineligible for ITR 2, choose either ITR 2 or 3 based on your income source (business/profession).

• On the subsequent page, choose ‘General’ and navigate to ‘Income Schedule’. From there, select ‘Schedule Capital Gains’ and indicate the type of capital assets involved.

• Differentiate between short-term and long-term capital gains. For reporting short-term capital gains (STCG), click on ‘Add details’ and provide the consolidated amount obtained from selling short-term assets, along with the Cost of Acquisition in the relevant financial year. When it comes to long-term capital gains (LTCG), you will need to furnish detailed information for each scrip. Fill out the necessary details in ‘Schedule 112A’ and click ‘Add’.

• After ensuring that all essential schedules are complete, review Part B TT1 and select ‘Preview Return’. Download the ITR file and proceed with the declaration.

• In the declaration tab, provide the required details and click on ‘Proceed to Validation’. Once validated, verify the ITR filing either by sending a signed ITR-V printout to the Income Tax Department office in Bangalore or by using the electronic verification method.

Note: The verification process may take up to 120 days after submitting the ITR.

Required Documents for Filing Income Tax Returns (ITR)

The documents necessary for filing ITR may vary depending on the taxpayer’s income source. However, certain documents are universally required for all taxpayers during the filing process. Below are the essential documents needed when filing income tax returns, specifically for capital gains and dividends:

• PAN card and linked Aadhaar card
• Form 26AS (provides details of taxes deducted and deposited with the tax department)
• Form 16 (contains information on salary and TDS deductions)
• Bank account details
• Salary slips (for salaried individuals)
• Proof of tax-saving investments (to claim deductions under section 80C)
• Documentation related to capital gains (such as purchase or sale deeds for property, statements from mutual fund houses)
• Additional important documents that may be required include receipts for health insurance premiums, interest certificates from banks or post offices, and receipts for home loan payments, among others.

Choosing the Appropriate ITR for Declaring Mutual Fund Income

When it comes to declaring mutual fund income in your income tax return (ITR), the choice of ITR form depends on the nature of the income. Here’s how you can determine the suitable ITR form for reporting mutual fund income:

• Mutual Fund Dividend Income:
  • If you are eligible to file ITR 1 and do not have any capital gains from mutual funds, you can declare your mutual fund dividend income under the category of ‘Income from other Sources’ in ITR 1. Provide the necessary details as required by the ITR 1 Form.
• Capital Gains or Losses from Mutual Fund Investments:
  • If you have capital gains or losses from mutual fund investments, ITR 1 is not suitable for reporting these transactions.
  • Instead, if you are a salaried taxpayer, you should file ITR 2.
  • If you have income from business or profession, you should file ITR 3.
  • Select the appropriate ITR form based on your specific income source and include the necessary details related to your capital gains or losses from mutual funds.

Declaring Mutual Fund Gains in Income Tax Returns (ITR)

To accurately file your income tax returns (ITR) and include your Mutual Fund earnings, follow these steps:

• Dividend Income from Equity Mutual Funds:
  • Previously exempt, dividends are now taxable and should be reported as “Income From Other Sources” in your ITR.
  • Dividends received from equity-oriented Mutual Funds are taxed based on your slab rates.
  • You can claim a deduction of up to 20% of the total dividend income for interest expenditure incurred. No other expenses are eligible for deduction.
• Disclosure of Dividend Income in ITR:
  • Report dividend income quarterly in the “Schedule of Other Sources” section of the ITR form.
  • Provide details for each period: up to 15th June, 16th June to 15th September, 16th September to 15th December, 16th December to 15th March, and 16th March to 31st March.
• TDS (Tax Deducted at Source) on Dividends:
  • Mutual Fund companies deduct TDS at a rate of 10% if the dividend exceeds Rs. 5,000.
  • Claim TDS credit by specifying the details under “TDS other than salary” in your ITR.
  • Use ET Money’s TDS Calculator for accurate calculations and to avoid compliance issues.

Declaring Capital Gains/Losses from Equity Mutual Funds in ITR

Capital gains or losses from equity mutual funds are determined by the difference between the purchase and sale values of the mutual fund units. Here’s what you need to know when reporting capital gains or losses in your income tax returns (ITR):

• Capital Gains: If the mutual fund units are sold at a higher price than the purchase value, it results in capital gains.
• Capital Losses: Conversely, if the sale price is lower than the purchase value, it leads to capital losses.
• Taxation of Capital Gains: The tax rate applicable to capital gains depends on whether they are categorized as short-term or long-term gains. The duration of holding the mutual fund units determines this classification.
  • Short-Term Capital Gains (STCG): If the units are held for one year or less before being sold, the resulting gains are considered short-term. STCG is taxed at the applicable slab rates.
  • Long-Term Capital Gains (LTCG): If the units are held for more than one year before being sold, the gains are classified as long-term. LTCG on equity mutual funds is currently taxable at a rate of 10% (without indexation) if the gains exceed Rs. 1 lakh in a financial year.

When filing your ITR, ensure proper disclosure of capital gains or losses from equity mutual funds, differentiating between short-term and long-term gains. This will ensure accurate taxation in accordance with the applicable rules and rates.

Classification of Mutual Fund Units as Short-Term or Long-Term

When it comes to the taxation of equity mutual funds, the classification of units as short-term or long-term depends on the holding period. Here’s how it works:

• Short-Term Capital Assets: Units of equity mutual funds are considered short-term capital assets if they are held for a period of 12 months or less from the date of purchase until the date of sale.
• Long-Term Capital Assets: On the other hand, if the units are held for more than 12 months immediately preceding the date of transfer or sale, they are treated as long-term capital assets.

The tax rates differ for short-term and long-term capital gains. Short-term capital gains are generally taxed at a higher rate compared to long-term capital gains.