This blog provides a complete guide on filing Income Tax Returns (ITR) for individuals who are investors in equity mutual funds. It starts by explaining the documents needed for filing ITR, such as Form 26AS, Form 16, and a capital gains statement.
The blog then provides step-by-step instructions on how to file ITR through the new Income Tax portal, including logging in with a PAN card and verifying bank details.
Next, it explains the different ITR forms available and helps readers choose the appropriate form based on their income sources. Specifically, it mentions that salaried individuals who have earned capital gains need to choose either ITR-2 or ITR-3.
The blog then focuses on mutual fund taxation and explains how to report dividend income and capital gains in ITR. It clarifies that dividend income from equity mutual funds is taxable and needs to be disclosed as “Income from Other Sources.” Deductions on interest expenditure related to dividend income are also elaborated upon.
Regarding capital gains from equity mutual funds, the blog explains the classification of units as short-term or long-term based on the holding period. It outlines the tax rates for long-term capital gains and exemptions available. It also provides an example calculation of capital gains.
Furthermore, it explains the reporting schedules in ITR for capital gains, including scheduling for units acquired before and after January 31, 2018. The blog directs readers on where to report short-term capital gains and discusses the treatment of capital losses.
Finally, the blog advises readers to e-verify their ITR after filling in all the necessary details.
If you are also a mutual fund investor and wondering how to file your Income Tax Return through the new tax portal, don’t worry, we have you covered in this blog. We will provide you with a complete guide on filing your ITR if you are an investor in equity mutual funds.
Documents Needed For Filing ITR
Apart from the documents like Form 26AS (it contains the details of the tax already deducted and deposited with the tax department), Form 16 (you get this from your employer) , interest certificate, you will need capital gains statement. If you have invested directly through a fund house, you can get it from them. If you have invested through an investment app like ET Money, you can download it from the app.
Steps For Filing ITR Through The New Income Tax Portal
- Go to the new tax portal (https://www.incometax.gov.in/).
- Log into the portal with your PAN card.
- Verify your bank details already saved with the portal or add the details if you are doing it for the first time.
- Go to the File Return Tab. Next, you will have to choose the assessment year as 2021-22.
- The next step is to Find the right ITR form and start filing it. Let’s understand this step in detail
Choosing the ITR Form
First let’s understand which ITR form you can choose if you have earned income from different sources.
There are around 7 ITR forms in total. The selection of a particular ITR Form depends on the nature of income that you earn during the relevant previous year. An individual taxpayer can file an ITR in ITR 1 to ITR 4. However, if you have earned capital gains/ losses during the year, it can only be reported in Form ITR-2 and ITR-3.
Thus, a salaried person who is otherwise eligible to file a return in ITR-1 will have to choose ITR-2 to report the capital gains. Return can be filed in ITR 3 by the taxpayer if he has income from business or profession. So, a person with business and professional income will have to file ITR 3 if he has to report capital gains/losses during the year.
Now, that you have understood which ITR form to select, let’s understand one by one how you will report dividends or capital gains/losses from mutual funds in ITR.
We will not show the other parts of filing ITR but will focus on the part related to Mutual Fund taxation and capital gains.
Mutual Funds Gains You Need to Show in ITR
Mutual Funds provide earnings in two forms – Capital Gains and Dividends, and these need to be disclosed in the ITR. First, let’s understand which ITR form you can choose if you have earned income from any of these sources during the year.
a) Taxation of Dividend Income From Equity Mutual Funds
Earlier, the dividend from mutual funds was exempt in the hands of mutual fund unitholders, whereas now it has become taxable and is required to be disclosed as “Income From Other Sources”. Dividends received by personal taxpayers from equity-oriented mutual funds shall be taxable in his hands as per slab rates.
An investor can claim a deduction of interest expenditure incurred to earn that dividend income to the extent of 20% of the total dividend income. No deduction is allowed for any other expenses, including commission or remuneration paid to a banker or other person, to realize such a dividend.
For example, a personal taxpayer has received Rs. 1,00,000 as dividend and has incurred expenditure Rs. 40,000 on interest on the loans borrowed to invest in these mutual funds. The allowable interest expenditure, in this case, would be Rs. 20,000 (being 20% of Rs. 1,00,000).
Disclosure of Dividend Income in ITR
The dividend income shall be disclosed in ‘Schedule of Other Sources’ in ITR form. It is to be reported quarterly in the ITR form i.e., dividend earned up to 15th June 2020, from 16th June 2020 to 15th September 2020, 16th September 2020 to 15th December 2020, 16th December 2020 to 15th March 2021, and 16th March 2021 to 31st March 2021.
The Mutual fund company is required to deduct TDS at the rate of 10% in cases where the dividend paid or payable for the financial year is more than Rs. 5,000. You can claim the credit of such TDS by giving the details under the head “TDS other than salary.” For Example, If your mutual fund dividend income is Rs. 1 lakh, Rs 10,000 will be deducted as tax. To avoid any calculation errors and compliance issues, you may use ET Money’s TDS Calculator to calculate the tax-deducted amount accurately.
b) Showing Capital Gains/ Losses from Equity Mutual Funds in ITR
Capital gains or loss is a difference between the value at which an investor purchased the units of a mutual fund scheme and the value at which these units are sold or redeemed.
If a mutual fund is sold at a profit, capital gains arise. Similarly, if the sale price is less than the purchase value, the resultant losses are termed as capital loss. The moment profits are earned from the sale of a mutual fund; the tax gets attracted.
The rate at which these capital gains will be taxed will depend on whether these gains are short-term or long-term.
Classification of Mutual Fund Units into Short Term or Long Term
Under current rules, equity mutual funds are to be bifurcated into a short-term capital asset or long-term capital asset based on its period of holding by the investor. The tax rate is higher on short-term capital gains than long-term capital gains.
The period of holding of these units is calculated from the date of purchase of mutual fund units till the date of its sale. Units of Equity mutual funds are treated as long-term capital assets if held for more than 12 months immediately preceding the date of transfer or otherwise short-term capital assets.
Computation of Tax on Long Term Capital Gains
The long-term capital gains arising from the sale of equity mutual fund units are exempt from tax up to Rs. 1 lakh. The balance amount is chargeable to tax at the rate of 10%.
The capital gains are computed by subtracting the purchase value from the full value of sale.
Earlier, long-term capital gains from equity mutual funds were tax-exempt, and the Finance Act 2018 introduced the tax on long-term capital gains.
Therefore, the gains made on these units until 31-01-2018 were grandfathered (i.e., exempted from tax). This means that gains made till 31-01-2018 will be tax-exempt.
To claim this benefit of grandfathering, the investors can choose the fair market value (FMV) that is the NAV of these units as of 31-01-2018 as the acquisition cost while computing the capital gains.
Calculating the cost of purchase of mutual fund units
If units of equity-oriented mutual funds were purchased before 31-01-2018, the cost of acquisition of such units shall be higher of the following:
- The actual cost of purchase of units of equity-oriented mutual funds; or
- Lower of the fair market value of such units as of 31-01-2018 or full value of the consideration received as a result of the transfer of these units.
The purchase cost of units of equity-oriented mutual funds, acquired on or after 01-02-2018, shall be the actual purchase price of such units.
For example, Rahul acquired 10,000 listed units of an equity-oriented mutual fund on 01-01-2017 for Rs. 300 per unit. He sold the units on 31-11-2020 for Rs. 500 per unit. The FMV of the units as on 31-01-2018 was Rs. 330 per unit.
|Date of Purchase||01-01-2017|
|Date of Sale||31-11-2020|
|Period of holding||47 Months|
|Nature of Capital Gain||Long-term capital gains.|
|Computation of Capital Gains|
|Full Value of Consideration [₹500*10,000]||₹50 lakh|
|Less: Cost of Acquisition: [₹330*10,000] Higher of:₹300 per unit (Actual cost of acquisition)Lower of the ₹330 per unit (FMV of such asset as on 31-01-2018) or ₹500 per unit (full value of the consideration received)||₹33 lakh|
|Amount of capital gains||₹17 lakh|
|₹16 lakh (i.e., capital gains above ₹1 lakh) shall be chargeable to tax at a concessional rate of 10%.|
There is a general confusion about whether gains or losses arising from such transactions under capital gains shall be reported separately or in aggregate. The Income Tax Department has clarified that the scrip-wise details in the return of income are required to be filled up only to report the long-term capital gains for these shares that are eligible for the benefit of grandfathering, i.e., shares acquired on or before 31-01-2018. The scrip-wise details are not required in income tax return forms to compute gains that are not eligible for grandfathering. So, you need to provide the total capital gains or loss number as per the current Mutual Fund Taxation rules.Also, if you have invested through the ET Money app, you do not need to do this manual tax calculation for capital gains. Just use the ET Money capital gains statement which will be helpful in filing your ITR.
Schedule For Reporting Capital Gains in ITR
Selecting a relevant schedule for reporting capital gains in ITR is very important. The long-term capital gains from equity-oriented mutual funds need to be reported in ‘Schedule 112A’. If you have short-term capital gains, that needs to be reported in Schedule CG.
Filling details for units acquired before 31st January 2018
Suppose you have selected the option that Share/Unit acquired on or before 31st January 2018. You need to enter the scrip-wise details of each such unit while filing your capital gains tax in Schedule 112A. Further, the ISIN Code (a 12-digit alphanumeric code that uniquely identifies a specific security), number of units, sale price per unit, the fair market value per unit as on 31st January 2018, and aggregate cost of acquisition needs to be entered as shown in the following screenshot:
Filling details of units acquired after 31st January 2018
You can submit the details of total long-term capital gain for the units of equity-oriented mutual funds acquired on or after 01-02-2018 in Schedule 112A. You will only be shown editable fields here; the rest of the fields will be auto-populated.
Computation of Tax on Short-Term Capital Gains
Short-term capital gains arising from the sale of equity-oriented mutual fund units are taxable at the special rate of 15%. To calculate short-term capital gains you need to subtract the purchase value of mutual funds from the sale value.
Where to Report Short-Term Capital Gains in ITR?
These details need to be filled in ‘Schedule CG’; you need to select the details of capital assets sold. The reporting of short-term capital gains on a unit of equity-oriented mutual funds on which securities transaction tax (STT) is paid is to be made under section 111A.
The next step is to enter the details of the full sale value and purchase cost to compute the short-term capital gains.
Treatment of Capital Loss on Mutual Funds
Income-tax Act allows a person to adjust his losses with taxable profits. Long-term capital loss can be set off only against long-term capital gains, and it cannot be set off against short-term capital gains, though both of them fall under the same head of capital gains. However, a short-term capital loss can be set off against any capital gain, whether short-term or long-term.
Suppose capital loss could not be set off against the eligible capital gains because of the inadequacy of income during the current year, in that case, it can be carried forward for 8 Assessment Years and set off against the relevant capital gains of the subsequent year. The short-term and long-term capital loss, which could not be set off during the year, shall be carried forward separately. The losses can be carried forward only if the return of income is filed on or before the due date.
In subsequent years, the short-term capital loss can be set off against the short-term or long-term capital gain but the brought forward long-term capital loss shall be set off only against long-term capital gains.
After you have filled in all the other details, you can submit the ITR. Don’t forget to e-verify the ITR as the tax filing process is not complete without it.