Income Tax Return: Confused over how to disclose capital gains on debt funds? Know where to put it

Whenever you sell or redeem units of equity-oriented or debt-oriented mutual fund (MF) schemes, it results in capital gain or loss – be it short-term or long-term in nature.

Income Tax Return: Confused over how to disclose capital gains on debt funds? Know where to put it
Without a clear indication, there is confusion among taxpayers regarding which option to be selected for disclosing gains from sale of debt-oriented MF units.

Whenever you sell or redeem units of equity-oriented or debt-oriented mutual fund (MF) schemes, it results in capital gain or loss – be it short-term or long-term in nature. The holding period for short-term capital gain (STCG) for debt funds is up to 36 months and that of equity funds is up to 12 months.

The STCG on debt funds is added to taxable income of an investor and is taxed as per the tax slab of the investor, while that of the equity fund is taxed at a rate of 15 per cent. On the other hand, long-term capital gains on debt funds are taxed at a rate of 20 per cent after indexation, while that of equity funds are taxed at 10 per cent, once the gain amount exceeds Rs 1 lakh in a financial year.

While space to disclose gains from equity funds are clearly mentioned in ITR Forms (ITR-2 and ITR-3), without a clear indication, there is confusion among taxpayers regarding which option to be selected for disclosing gains from sale of debt-oriented MF units.

No clear demarcation for capital gains on debt

“It is important for every taxpayer to file their tax return correctly in order to avoid any potential inquiry from the income tax authorities in future. With respect to any short term gains derived from Debt oriented Mutual funds, the taxpayers may consider to select the option “From Sale of Assets other than all the above listed items” in the Capital Gains Schedule,” said Dr. Suresh Surana, Founder, RSM India.

“Reason being, it is apparent that Debt oriented Mutual Funds cannot be classified as Land or Building and this option is ruled out. Further, the same cannot be classified as units of Equity Oriented Mutual Fund (as Equity Oriented Funds invest 65 per cent of their portfolio in Equity Investments) and to be treated as short term Capital Gains they have a threshold holding Period of 12 Months whereas Debt oriented funds have a threshold holding period of 36 months. Also, the same cannot be classified under any other available category such as Bonds or Debentures, Equity Share, GDR, etc,” he added.

“Thus, the most suitable option with regards to disclosure of short term gains from debt-oriented mutual funds seems to be classified in the residuary category of “From Sale of Assets other than all the above listed items”,” Dr. Surana further said.

Even after entering the page to put the amounts of capital gains, the confusions would still prevail as there is no mention of debt funds or debt-oriented mutual funds in that page as well.

This is because, in the page meant to add “sale of assets other than all the above listed items,” the options given are as follows:

  • Amount of consideration received/receivable in respect of unquoted shares
  • Amount of consideration in respect of assets other than unquoted shares

Here also one has to assume that the figures to be entered against the option “assets other than unquoted shares” as debt funds are not unquoted shares.

Instead of leaving the taxpayers a confused lot and forcing them to make decisions on the basis of assumptions, the CBDT should consider a clear demarcation for the debt-oriented MF schemes in the capital gain page to make the things better.

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