By Sreenivasulu Reddy
Over the last decade, the Indian mutual fund industry has experienced significant growth. While many individuals recognise the importance of selecting a suitable mutual fund for financial success, few realise the importance of understanding the tax implications and appropriate reporting in the tax returns.
Equity vs debt mutual funds
In India, mutual funds are mainly categorised as equity-oriented and debt-oriented mutual funds. Each type has its own tax rules, which have undergone substantial revisions in recent years.
Understanding the reporting requirements linked to these investments is crucial for filing appropriate income tax return (ITR). For FY 2024-25, resident individual taxpayers with long-term capital gain (LTCG) up to Rs 1.25 lakh from listed equity shares or equity mutual funds can use the simpler ITR-1 (Sahaj) form to file their ITR, provided there are no carried forward losses.
Individual taxpayers having income from capital gains (other than above) but no business income should consider ITR-2 Form (instead of ITR-1), specially in case of carried forward of losses.
Schedule CG
Schedule CG is dedicated to capital gains disclosure which requires reporting on type of asset transferred (short term or long term), date of acquisition and sale, sale consideration, indexed cost of acquisition (for long term capital assets, where applicable). They should look at exemptions availed for LTCG if the proceeds are reinvested in specified avenues (like reinvestment in another residential property, etc.) The schedule requires quarter-wise breakup of gains and corresponding tax reporting (for advance tax liability and interest computation under Section 234C).
A significant change this year is the requirement to segregate capital gains based on the transaction date — before and after July 23, 2024 (to align with the revised capital gains tax rules). Taxpayers should disclose the value of holdings under assets & liabilities schedule (shares and securities) if taxable income exceeds Rs 1 crore.
Misreporting/ inaccurate reporting of capital gains could attract interest and penal implications. Also, one should verify the sale and purchase details with data reflecting in Form 26AS, the Annual Information Statement (AIS), and the Taxpayer Information Summary (TIS) to avoid incorrect reporting and enquiries from the tax authorities.
What not to ignore
Capital losses can be carried forward for eight assessment years immediately succeeding the assessment year for which the loss was first computed. The capital loss can be set off against future gains, provided the loss was reported in the ITR. Further, documentation with respect to purchase and sale of mutual funds for the purpose of reporting and audit readiness is needed.
While income from mutual funds is not tax-free, there are tax benefits depending on the type of mutual fund and holding period of the investment.
The writer is tax partner, EY India. Inputs from Garima Agrawal, director, Tax, EY India