Mutual Fund Investors: Declare Investments In Your Itr

Mutual funds are a popular investment option, offering individuals a simple way to diversify their portfolios. However, with mutual funds come tax liabilities and the need to file an ITR (Income Tax Return). This article will discuss how to declare mutual fund investments and disclose capital gains in your ITR, helping you stay compliant with tax regulations. We will cover the different types of income from mutual funds, how to choose the right ITR form, and the steps to file your tax returns accurately. By understanding how to declare your mutual fund investments, you can ensure that your tax liability is calculated correctly.

Dividend income from mutual funds

Dividends from mutual funds are considered income and must be declared under 'Income from other sources' in the ITR. This is true for both equity and debt mutual funds. Salaried individuals can declare this under 'Income from other sources' in ITR-1.

Dividend income is taxable in the receiver's hands per the applicable slab rates. The taxpayer is also eligible to claim a deduction of up to 20% of the dividend income for the interest expense incurred to earn the dividend.

Mutual fund houses will deduct TDS (Tax Deducted at Source) u/s 194K @ 10% when the dividend exceeds Rs 5,000. This TDS amount will be reflected in your form 26AS, which can be claimed as a tax credit when filing your ITR.

Dividend income needs to be reported every quarter in the ITR form.

Capital gains from mutual funds

Capital gains refer to the profits made from selling mutual fund units at a higher price than the purchase price. The tax rate on capital gains depends on the type of mutual fund and the holding period. There are two types of capital gains: short-term and long-term. Short-term capital gains occur when mutual fund units are sold within a certain period from the date of purchase, while long-term capital gains occur when the units are held for a longer period.

Equity-Oriented Mutual Funds

Equity-oriented mutual funds have at least 65% of their portfolio invested in Indian-listed equity shares. If the holding period for these funds is less than a year, the gains are considered short-term capital gains and are taxed at 15%. If the holding period is more than a year, the gains are considered long-term capital gains and are taxed at 10%. There is also an exemption of up to ₹1,00,000 on long-term capital gains, and the tax is calculated only on gains above this amount. Examples of equity-oriented mutual funds include tax saver funds, index funds, large and mid-cap funds, and flexi-cap funds.

Non-Equity Oriented Mutual Funds

Non-equity mutual funds have less than 65% exposure to Indian-listed equity shares. Until March 31, 2023, if the holding period was less than three years, the gains were considered short-term and taxed according to the individual's income tax slab rate. If the holding period exceeded three years, the gains were classified as long-term and taxed at 20% with indexation benefits. Examples of non-equity mutual funds include gold funds, low-duration funds, and US opportunity funds.

Amendments in the Finance Act 2023

The Finance Act 2023 introduced changes to the taxation of non-equity mutual funds. Any non-equity funds purchased after April 1, 2023, and subsequently sold are considered short-term, regardless of the holding period, and the slab rate is applied. This change affects not only debt mutual funds but also other types of funds, such as gold funds and international funds. However, for non-equity funds purchased before March 31, 2023, the old provisions of long-term and short-term capital gains still apply.

Reporting Capital Gains in ITR

To report capital gains from mutual funds in your ITR, you need to follow these steps:

• Visit the official website of the Income Tax Department and log in with your credentials.
• Choose the 'e-file' option, then click on 'Income Tax Returns' and select 'File Income Tax Returns'.
• Select the assessment year, status, and type of form (ITR-2 or ITR-3 for capital gains). Choose 'taxable income is more than the exemption limit' as the reason for filing.
• Select 'General' and then 'Income Schedule' on the next page. After that, select 'Schedule Capital Gains' and the type of capital asset from the provided list.
• To report short-term capital gains, click on 'Add details' and mention the consolidated amount received from the sale of short-term assets and the Cost of Acquisition in the financial year.
• For long-term capital gains, provide scrip-wise details in Schedule 112A.
• After confirming the schedules, review Part B TT1 and click on 'Preview Return'.
• Provide the remaining details and click on 'Proceed to Validation' under the declaration tab.
• Verify your ITR electronically within 120 days of filing.

ITR forms for declaring mutual fund income

When investing in mutual funds, it is important to know how to file income tax returns for capital gains earned from them. There are two types of returns that you can earn from investing in mutual funds: dividends and capital gains. The returns generated from 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 gains. Income tax has two broad categories of mutual funds: equity-oriented and non-equity-oriented.

Equity-Oriented Mutual Funds

Equity-oriented mutual funds have at least 65% of their portfolio invested in Indian-listed equity. The tax treatment for these funds varies based on the holding period. If the holding period is less than one year, the returns are considered short-term capital gains (STCG) and are taxed at 15%. If the holding period exceeds one year, the returns are classified as long-term capital gains (LTCG) and are taxed at 10%. Additionally, there is an exemption of up to ₹1,00,000 on LTCG, meaning tax at 10% is only calculated on gains above ₹1,00,000. Examples of equity-oriented funds include tax saver funds, index funds, large and mid-cap funds, and flexi cap funds.

Non-Equity Oriented Mutual Funds

Non-equity mutual funds have less than 65% exposure to Indian-listed equity shares. Until March 31, 2023, if the holding period was less than three years, it was considered a short-term capital gain, and the individual's income tax slab rate was applied. If the holding period was more than three years, a tax of 20% was computed after indexation. Examples of non-equity-oriented mutual funds include liquid mutual funds, low-duration funds, gold funds, and US opportunity funds.

Any person earning any capital gain during the financial year has to file either ITR-2 or ITR-3. Capital gains arising from mutual funds are taxed only in the year in which its units are redeemed. Taxpayers having capital gains during a year are required to file ITR-2. Individuals who earn their income from a business or profession need to file ITR-3.

Steps to Show Mutual Fund Income in ITR

• Visit the income tax department's official website and log in with your ID and password.
• Select the e-file option. Click on Income Tax Returns > File Income Tax Returns.
• Now, select the type of form, status, and assessment year. Select ‘taxable income is more than the exemption limit’ as the reason.
• Select ‘General’ on the first page and ‘Income Schedule’ on the next page. Now, select ‘Schedule capital gains’ and the type of capital asset redeemed from the drop-down menu.
• Capital gains can be either long-term or short-term in nature. To report short-term capital gains, click on ‘Add details’ and mention the aggregate amount you received from the sale of short-term capital assets and the acquisition cost. To report long-term capital gains, you must provide the details of every scrip separately. Once you have added all the required details in schedule 112A, click ‘Add.’
• After you have confirmed all the schedules, you must review Part B TT1 and click on ‘Preview return.’
• Provide the remaining details and click on ‘Proceed to Validation’ under the declaration tab. Once you have validated your ITR, the next step is to verify it. You can either send a signed ITR-V to the Income Tax Department or file it electronically. You can take a maximum of 120 days for verification after filing the ITR.

Disclosing mutual fund dividend income

Dividend Income Disclosure:

Any dividend income from mutual funds, whether it is from debt mutual funds or equity mutual funds, is considered the investor's income. It should be added to their total income under the head "Income from Other Sources". This income is taxable in the receiver's hands at their applicable slab rates. If you are a salaried individual, you can disclose such dividend income in ITR-1 under 'Income from Other Sources'.

TDS on Dividend Income:

The Mutual Fund company is responsible for deducting TDS (Tax Deducted at Source) on dividend income. If the dividend paid or payable for the financial year exceeds Rs. 5,000, TDS will be deducted at a rate of 10%. You can claim the credit for this TDS under the head "TDS other than salary" in your ITR.

Declaration in Schedule of Other Sources:

The dividend income should be disclosed in the 'Schedule of Other Sources' in the ITR form. It needs to be reported quarterly, i.e., the dividend earned during each quarter of the financial year.

Deduction for Interest Expenditure:

As an investor, you are eligible to claim a deduction of up to 20% of the dividend income for the interest expense incurred to earn that dividend. This deduction is applicable for interest expenditure but not for other expenses like commission or remuneration paid to bankers or other persons.

Dividend Reinvestment:

If you have opted for the dividend reinvestment option, the reinvested amount should be considered a fresh investment in mutual funds. You don't need to separately mention the dividends received in ITR-2 or ITR-3 as they are tax-free.

By following these guidelines, you can accurately disclose your mutual fund dividend income in your ITR and ensure compliance with tax regulations.

Reporting capital gains from equity mutual funds

Capital gains refer to the income generated from the sale of bonds, mutual funds, or stocks. This income is taxable under the provisions of the IT Act. To assess tax liability and file income tax returns correctly, it is important to know the total capital gains earned in a fiscal year.

Capital gains from equity mutual funds are taxed based on whether they are short-term or long-term capital gains. Short-term capital gains occur when the units of equity mutual funds are sold within 12 months of purchase, while long-term capital gains occur when the units are held for more than 12 months before sale.

The tax rate for short-term capital gains from equity mutual funds is 15%. To calculate the short-term capital gains, subtract the purchase value of the mutual funds from the sale value. These details need to be reported in Schedule CG of the ITR form.

Long-term capital gains from the sale of equity mutual fund units are exempt from tax up to ₹1,00,000. The balance amount above this threshold is charged at a rate of 10%. To compute the long-term capital gains, subtract the purchase value from the full value of the sale. Long-term capital gains from equity-oriented mutual funds need to be reported in Schedule 112A of the ITR form.

To file your income tax return for capital gains from equity mutual funds, follow these steps:

• Visit the Income Tax Department's official website and log in using your credentials.
• Choose the 'e-file' option and then click on 'Income Tax Returns'.
• Select 'File Income Tax Returns' and choose the assessment year, status, and type of form.
• Select 'taxable income is more than the exemption limit' as the reason.
• Select 'General' and then 'Income Schedule' on the next page.
• Choose 'Schedule Capital Gains' and select the type of capital assets from the provided list.
• For short-term capital gains, click on 'Add details' and mention the consolidated amount received from the sale of short-term assets and the Cost of Acquisition in that particular financial year.
• For long-term capital gains, provide scrip-wise details in Schedule 112A.
• After confirming all the necessary schedules, review Part B TT1 and click on 'Preview Return'.
• Provide the remaining details and click on 'Proceed to Validation' under the declaration tab.
• Verify your ITR electronically.

It is important to note that capital gains from mutual funds are only taxed in the year in which the units are redeemed. Additionally, any dividend income from equity mutual funds should be disclosed in the 'Schedule of Other Sources' in the ITR form.

Frequently asked questions