Here's what constitutes capital gains for mutual funds and how your existing investments need to be accounted for in your IT return.
Tax filing earlier used to be a cumbersome process, with most of us resorting to our CAs for help. However, with e-filing and modifications to the AY-2018-19 filing method, any person can do it himself as long as he follows the procedures and keeps the relevant documents handy.
If you are filing ITR online or on incometaxindiaefiling.gov.in, you will see 7 ITR forms along with their briefs. If you are a salaried person and have not had any capital gains, then ITR-Form 1 is the option for you. But if you are salaried or an HUF with capital gain/loss, you will need to resort to the ITR-Form 2.
Those who’ve sold mutual funds also fall under this ambit and have to declare their gains or losses. Let us find out what constitutes capital gains for MFs and how your existing investments need to be accounted for.
What is Capital Gain?
Capital assets could be any form of wealth like land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, jewellery, stocks and even mutual funds. Any profit or gain that arises from the sale of any of these ‘capital assets’ is a capital gain. These gains could be taxable in your hands, subject to the taxation rules of the year in which they occurred. The rules of taxation differ from one capital asset to another. For example, the rules for capital gains on equity mutual funds are different from those of debt mutual funds.
Mutual Fund Gains & Losses
Investing in MFs does not immediately concern the I-T Department. However, if you make a profit or loss after redeeming your MF investment, the I-T Department wants to know about it. The nature of the investment, whether it is a debt fund or an equity fund, determines the exact tax impact on the investor.
In a debt MFs, capital gains earned on investments held for under three years are called Short Term Capital Gains. Gains on investments held longer than three years are called Long Term Capital Gains. For equity MFs, gains become long-term if held for one year.
Depending on what your gains (or losses) are, they need to be disclosed appropriately while filing your tax returns.
Short and long-term capital gains tax on MFs
|Equity / Balanced Mutual Fund||< 1 Year|
|> 1 Year|
10% above gains of Rs 1 lakh (no indexation benefit)
|Debt Mutual Fund||< 3 Year||At applicable Slab Rate||> 3 Year||20% (with indexation benefit)|
|*Tax rate excludes cess and surcharge, if any|
|Data as on 10 July 2018|
All funds will attract tax to some level on redemption. The short-term taxes are higher, of course, as shown in the table above, while long-term taxes are lesser. One can also claim short-term and long-term capital losses incurred during redemption of both debt and equity mutual funds.
Mutual fund schemes have dividend plans where the fund house releases dividends to investors periodically. The dividend that is received in the hands of the investor is tax free up to Rs 10 lakh in a year. The dividend earnings of a large majority of retail MF investors would fall within this limit. However, the income still needs to be declared.
Listing on the Correct ITR Form
ITR Form 2 is for Individuals and HUF not carrying out business or profession under any proprietorship, but having income from sources other than salary. Make sure to take out FY-2017-18’s transaction statements from all your fund holding platforms before you get ready to file the ITR.
Remember that tax is calculated on the entire value of redeemed funds and not on an individual fund. For instance, you will be liable to pay LTCG of 10% only if gains from your entire portfolio exceed Rs 1 lakh, and not from a single fund.
Unlike ITR-Form 1 and For 4, you cannot file this form online. You will have to download the Income Tax XML for ITR 2 from the Income Tax Department’s website, fill it, and submit a return by logging in and uploading the XML, in the income tax portal.
For those seeking deductions, if you have not claimed the same while submitting investment to your employer, you can do that in the form here. Remember for MFs, only pension and ELSS category of funds can be claimed for deductions under Section 80C up to a maximum of Rs 1,50,000.
Remember that other than MFs if you hold other capital assets like property, gold and more and have made gains by their sale, you will have to list the same in the same XML form. Income accumulated from renting out property also has to be listed on the form.
(The writer is CEO at Bankbazaar.com)