Mutual Fund (MF) is considered as a safer way to venture into equity markets compared to direct investments in stocks. This is because equity-oriented MF schemes provide a ready-made diversified portfolio managed by professional fund managers.
As a result, salaried individuals and persons engaged in other professions may invest without the worry of studying and tracking markets and making large investments to buy individual stocks of leading companies.
Apart from equity-oriented funds, investors may also use debt-oriented MF schemes for their short to medium term goals. With no or limited exposure to equity markets, debt funds are relatively stable and provide tax efficient returns.
Investors may opt for dividend option to get regular return without redeeming the units and/or opt for capital gains by redeeming the units. Redemption may be done at a time for lump sum gains or periodically through Systematic Withdrawal Plan (SWP) for periodic gains.
Whenever an investor gets the returns either through dividend or through redemption, he/she needs to pay tax subject to gross total income in a financial year.
Not only returns and gains are taxable, but such incomes are also to be disclosed in the Income Tax Return (ITR) while filing the return of income.
Following are the tax rules on the incomes on MF investments and how to disclose such incomes:
On receiving dividends – be it from debt funds or equity funds, it becomes taxable in the hands of the investors. Dividends are added to the income of an investor as income from other sources.
A salaried taxpayer may disclose dividend received in ITR-1 under the head Income from Other Sources.
Depending on the period of holding before redemption, taxation rules are different for debt funds and equity funds.
Short-term Capital Gains
The holding period for short-term gains and taxation rules are different for debt and equity funds.
Redemption made within 36 months from the date of purchase of units of debt-oriented MF schemes are considered as short-term capital gains. Such gains are added to the total income of an investor and are taxed accordingly.
Redemption made within 12 months from date of purchase of units of equity-oriented MF schemes are considered as short-term capital gains. Such gains are taxed at a rate of 15 per cent.
Long-term Capital Gain
Like short-term, the holding period and taxation rules for long-term gains are also different for debt and equity funds.
Gains on redemption made after 36 months from the date of purchase of the units of debt-oriented MF schemes are known as long-term capital gains. Such gains are taxed at a rate of 20 per cent after indexation.
Gains on redemption made after 12 months from the date of purchase of the units of equity-oriented MF schemes are known as long-term capital gains. Such gains – in excess of Rs 1 lakh in a financial year – are taxed at a rate of 10 per cent without indexation.
How to disclose in ITR
As there is no provision in ITR-1 to disclose capital gains, after redeeming MF units – be it debt fund or equity fund and short-term gain or long-term gain – a salaried taxpayer will not be able to ITR-1, but have to disclose the gain/loss in the Capital Gain pages in the ITR-2 Form. Page 112A is specifically provided in ITR-2 for disclosing capital gains/losses on sale of equity-oriented MF schemes.