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

Mutual funds investments have been a staple in most Indian investment portfolios since decades. They offer suitable investment options for every investor and can meet their specific financial goals. However, many new investors often face the question of how to declare the income from mutual funds and the ITR to be filled in this regard. Do you face the same dilemma? Then you have come to the right place. Read on to get answers on how to declare mutual fund investments in ITR and disclose capital gains.

Read More: Changes in tax benefits on debt mutual funds

What are the different incomes from mutual funds and how are they taxed?

Let’s begin by understanding the types of income that can be received by investors from mutual funds and their taxation as per the Income Tax Act 1961. 

Dividend

The first and more regular form of income received from mutual funds is in the form of dividends. These are dividends declared by the companies and the portion to be received by investors in proportion of their investment. These dividends were earlier tax-free in the hands of investors. However, post Budget 2020, the tax incidence of dividends was shifted from corporates to investors. Thus they became taxable income for investors to be taxed at the applicable slab rates. 

Investors having only dividend income from mutual funds can declare the same as ‘Income from Other Sources’. They can file it in ITR 1 provided they have no capital gains and the net taxable income is up to Rs. 50,00,000. Investors are eligible to claim a deduction of 20% on their total dividend income. This excludes any expenses such as commissions or remuneration paid to banks or agents, which are not eligible for the deduction.

Capital gains

Capital gains are the profits from the sale of capital assets after considering the cost and eligible expenses incurred in redeeming the same. As per the Income Tax Act. 1961, capital gains are classified as short-term gains and long-term gains depending on the nature of the asset and the period of holding. The taxation of capital gains from mutual funds is explained hereunder.

Type of fund	Holding period for Short term gains	Taxable rate	Holding period for Long term gains	Taxable rates
Equity mutual funds	Up to 12 months	15% (plus cess and surcharge)	More than 12 months	Exempt up to Rs.1,00,000Above Rs.1,00,000 taxed at 10% (plus cess and surcharge)
Debt mutual funds	Less than 36 months	According to applicable slab rates	More than 36 months	20% (plus cess and surcharge)*
Hybrid Mutual funds (equity-oriented)	Up to 12 months	15% (plus cess and surcharge)	More than 12 months	Exempt up to Rs.1,00,000Above Rs.1,00,000 taxed at 10% (plus cess and surcharge)
Hybrid Mutual funds (debt-oriented)	Less than 36 months	According to applicable slab rates	More than 36 months	20% (plus cess and surcharge)

Amendment in taxation of debt mutual funds

The above tax treatment of debt mutual funds was applicable till 31st March 2023. However, post an amendment in Budget 2023, there has been a change in the tax treatment of debt mutual funds. According to the amendment, debt mutual funds investing less than or equal to 35% in equities are no longer eligible for indexation benefit. Capital gains from these funds will be taxable in line with the short-term capital gains on debt funds, i.e. taxable at the applicable slab rates. This amendment is applicable to all the mutual funds having less than or up to 35% investment in equities which includes hybrid funds, Fund of Funds, international funds, etc. 

How to choose ITR for declaring mutual fund income?

As mentioned above, if a taxpayer eligible to file ITR 1 does not have any capital gains from mutual funds, they can declare their mutual fund dividend income under ‘Income from other Sources’ with the required details as per the ITR 1 Form. However, in the case of capital gains or losses from mutual fund investments, taxpayers cannot disclose the same in ITR 1. In such cases, they can file ITR 2 (salaried taxpayers) or ITR 3 (taxpayers having income from business or profession) as the case may be. 

Schedules to disclose capital gains or losses

The details of the capital gains or losses from mutual funds have to be disclosed in the relevant schedules to the ITR as per the provisions of The Income Tact. Taxpayers have to select the relevant schedule based on the nature of the capital gain or loss. Short-term capital gains or losses from equity-oriented mutual funds on which STT is paid under Section 111A have to be disclosed under ‘Schedule CG’ while long-term capital gains or losses from equity-oriented mutual funds on which STT has been paid have to be disclosed under Schedule 112A. 

What is the treatment for capital loss on mutual funds?

The Income Tax Act, 1961 provides for adjustment of capital loss in the current year as well as the benefit of carrying it forward up to 8 subsequent assessment years. However, the precondition to avail of such a benefit is declaring the capital loss in the relevant ITR within the prescribed due dates. As per the provisions of the Act, the short-term capital loss from the sale of capital assets can be set-off against the short-term or long-term capital gains in the current or subsequent years. However, long-term capital loss can be set-off only against long-term capital gains from the sale of capital assets in the current or subsequent years.   

Conclusion

Mutual fund income from dividends and capital gains are part of the taxable income of a taxpayer and they have to be mandatorily declared in the relevant financial year to ensure the determination of the correct tax liability. Failing to declare mutual fund investments and the income from the same can lead to the wrong declaration of taxable income which can lead to levy of interest and penalty. However, taxpayers should note that they do not need to declare their capital gains or losses from mutual fund investments till the time they are redeemed.  

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