Reporting Tax on Gains from Equity Mutual Funds in ITR for AY 2023-24

The deadline to submit the Income Tax Return (ITR) for Assessment Year (AY) 2023-24 is 31st July 2023. Taxpayers must disclose all their income sources in the ITR, which includes any profits earned from investments in equity mutual funds.

Like many other investment assets, mutual funds are subject to taxation. The tax levied on the sale of mutual fund units varies based on several factors. These factors include the type of mutual fund, the units’ length, the capital gains generated, dividends received, and income distribution. Abhishek Soni, CEO and Co-founder of Tax2win, a Fisdom company, explains this aspect.

According to experts, debt and equity-oriented mutual funds are both subject to taxation. However, the tax rates and provisions differ based on the specific type of mutual fund. Essentially, there are two taxable categories of mutual funds – equity and non-equity funds. Each category is subject to its own set of tax rules and regulations.

Before delving into the methods of reporting tax on gains from equity mutual fund investments in the Income Tax Return (ITR), it is important to understand how equity and debt funds are taxed. 

Taxation of Equity Mutual Funds

Equity funds are classified as mutual funds, with 65% or more of their investments in equity instruments. When the holding period of your equity fund is one year or less, it is considered short-term capital gains. According to Soni, short-term capital gains are subject to a flat tax rate of 15% regardless of your applicable income tax slab rate.

If you hold your equity fund investment for over a year, any gains from selling it will be categorised as Long-Term Capital Gains (LTCG). The good news is that LTCGs up to Rs 1 lakh are exempt from taxation. However, any gains exceeding Rs 1 lakh per year will be subject to a flat tax rate of 10% without the benefit of indexation.

Taxation of Debt Funds

Mutual funds having over 65% of their investments in debt instruments, are referred to as debt-oriented or hybrid funds. If you hold these debt funds for less than three years, any gains from their sale are categorised as short-term capital gains. These gains are then combined with the individual’s other income and taxed according to the applicable income tax slab rates, as explained by Soni.

Before enacting the Finance Act 2023, gains obtained from selling debt funds after holding them for three years were treated as Long-Term Capital Gains (LTCG) and taxed at a flat rate of 20%, with the indexation benefit. If you sold debt funds during the Financial Year 2022-23, these gains would be subject to the above tax rules when reporting them in the Income Tax Return (ITR) for Assessment Year 2023-24.

Under The Finance Act 2023, there have been changes in the taxation rules for mutual funds. For 100% debt-oriented funds or funds with investments in equity instruments limited to 35%, regardless of the holding period, no indexation benefit is available for investments made on or after 1st April 2023. This means that even if you hold these funds for more than three years, you cannot claim the benefit of indexation for calculating the tax on the gains from selling these funds.

According to Soni, gains from debt mutual funds will be added to your taxable income and taxed at the normal tax slab rate. But this will be applicable for FY- 2023-2024 (AY 2024-25).

How to report tax on gains from mutual funds in ITR?

As per Soni’s advice, if you have gained from selling equity mutual funds, you should file an Income Tax Return (ITR) and follow these steps:

1. Prepare the necessary documents, such as Form 26AS/AIS/TIS (tax credit statement), Form 16 (if applicable), the interest certificate, and the capital gains statement.
2. Choose the appropriate ITR form and disclose any dividend income quarterly in the ‘Schedule of Other Sources’ section of the ITR form.
3. If you need to report tax on long-term capital gains from equity-oriented mutual funds, do so in ‘Schedule 112A’ of the ITR form.
4. For short-term capital gains, report them in ‘Schedule CG’ of the ITR form.

You can ensure proper compliance with tax regulations by following these steps and accurately reporting your gains from equity mutual funds.

Lastly, try filing your returns before the due date, as not doing so can lead to penalties. ITR can be filed through the income tax portal or tax filing companies, like Cleartax.in where the tax experts can guide you at each step and maximise your savings.

For any clarifications/feedback on the topic, please contact the writer at samiksha.swayambhu@clear.in