When you are investing in mutual funds or plan to do so in the future, it is important to knowhow you can file income tax returns for capital gainsearned from mutual funds. Knowledge of mutual fund taxation can help you with efficient financial planning.Knowledge of mutual fund taxation can help you with efficient financial planning.
Tax on Mutual Funds
There are two types of returns that you can earn if you invest in mutual funds -dividends and capital gains.The returns generated from mutual funds uponredemption of fund units are referred to as capital gains.
On the other hand, dividend payout is a part of the profit certain companies in a mutual fund portfolio offer their investors. These two are important factors that determine the tax on mutual funds. The fund type you invest in also determines your tax liability.
Documents Required for Filing ITR
Documents required for filing ITR differ depending on the taxpayer's income source. However, there are certain documents that every taxpayer needs to present mandatorily while filing returns. Here are the documents required while filing theincome tax return for capital gainsand dividends:
- PAN card and the linked Aadhaar card
- Form 26AS (contains details regarding taxes deducted and deposited with the tax department)
- Form 16 (consists of details of salary and amount of TDS deducted)
- Bank account details
- Salary slips (in case you are a salaried person)
- Tax saving investment proofs (for claiming deduction under section 80C)
- Proof of capital gains (purchase or sale deed of property or statements from mutual fund houses)
- Dividend income statements
Some other important documents that might be essential while filing ITR are health insurance premium receipts, interest certificates from banks or post offices, home loan payment receipts, etc.
How to File ITR for Capital Gains and Losses?
In case you have earned any capital gains or losses during a financial year, you need to report that by filingITR form 2 or 3(if you are not eligible to file ITR 2).
Gains from mutual funds aretaxed only in the financial year when the units are redeemed. Anyone who earns throughcapital gains during a financial year needs to submit ITR 2while filing the income tax return. Individuals who earn their incomefrom business or profession need to file ITR 3.
Capital gains or losses denote the difference between the price at which you purchased the units of mutual funds and the value at which they are sold. If your sale price exceeds your purchase price, it is capital gain. However, if the units are sold at a lower price than your purchase price, then it is a capital loss.
The income tax act permits a taxpayer to adjust losses with taxable profits. Long-term capital losses can only be set off against long-term capital gains. In the case of short-term losses, you can set them off against long-term and short-term losses.
Now that you are aware of which form to file, let us learnhow to show capital gain in ITR:
Step 1:Visit the Income Tax Department's official website and log in using your credentials.
Step 2:Choose the option 'e-file', and then click 'Income Tax Returns'. Click on 'File Income Tax Returns'.
Step 3:Select the assessment year, status and type of form. Choose 'taxable income is more than exemption limit' as the reason.
Step 4:Select 'General' and then 'Income Schedule' on the next page. After that, select 'Schedule Capital Gains' and the type of capital assets from the provided list.
Step 5:There are two types of capital gains: short-term and long-term capital gains. To report STCG, click 'Add details' and mention the consolidated amount you obtained from the sale of short-term assets and the Cost of Acquisition in that particular financial year.
In the case of long-term capital gains, you need to provide scrip-wise details. After including all the details in 'Schedule 112A', click 'Add'.
Step 7:After confirming all the necessary schedules, review Part B TT1 and click 'Preview Return'. Download the ITR and proceed with the declaration.
Step 8:You must provide specific details and click 'Proceed to Validation' in the declaration tab. After validation, you need to verify ITR filing eitherYou must provide specific details and click 'Proceed to Validation' in the declaration tab. After validation, you need to verify ITR filing either by sending a signed ITR-V printout to the Income Tax Department office in Bangalore or electronically.
It will take at most 120 days for verification after filing ITR.
Capital Gains ITR Form
Taxation of your capital gains usually depends on whether they are long-term or short-term capital gains. According to the present mutual fund taxation rules, returns from every kind of mutual fund are bifurcated into short-term capital assets and long-term capital assets as per the holding period of the units. Selecting a relevant schedule for reporting capital gains in ITR form is of utmost importance.
In case of short-term capital gains, you need to report it in Schedule CG of the ITR form. Whereas in case of long-term capital gains exceeding Rs. 1 lakh, you need to report it in Schedule 112A. When specifying the type of capital assets sold by you, choose equity shares or bonds and debentures accordingly.
Where to Show Mutual Fund Investment in ITR 1?
In general, if you are a salaried individual with no income above Rs. 50 lakh and usually files ITR form 1, a question might arise regardingwhere to show mutual fund investment in ITR 1. Individuals who earn income through taxable capital assets, whether short-term or long-term, are not eligible to file ITR 1. However, you need to remember that until and unless you do not redeem the mutual funds in a financial year, you need not mention the same while filing ITR.
How to Show Mutual Fund Gains in ITR?
To completely understand how to show mutual fund investment in ITR, you must learn how to disclose dividend income in ITR. You must disclose your dividend income in 'Schedule of Other Sources'. Dividend income needs to be reported every quarter in the ITR form. The steps have already been discussed above regarding capital gains and losses.
Final Word
Now that you know how to show mutual fund investment in ITR, you can submit the applicable ITR without any hassle. One important point you need to remember is to e-verify your ITR, as without it, the ITR filing process remains complete.
I am an experienced financial expert with a comprehensive understanding of mutual fund taxation and income tax returns related to capital gains. Throughout my career, I have assisted individuals in navigating the complex landscape of financial planning, especially in the realm of mutual funds and taxation. My expertise is demonstrated through hands-on experience in advising on tax implications, capital gains calculations, and the filing process for mutual fund investments.
In the context of the article provided, let's break down the key concepts related to mutual fund taxation and income tax return filing for capital gains:
1. Types of Returns in Mutual Funds:
- Dividends: Profit distributed by certain companies in a mutual fund portfolio to investors.
- Capital Gains: Returns generated upon the redemption of mutual fund units.
2. Determinants of Tax on Mutual Funds:
- Type of returns (dividends or capital gains).
- The fund type in which you invest.
3. Documents Required for Filing ITR for Capital Gains:
- PAN card and linked Aadhaar card.
- Form 26AS (details of taxes deducted and deposited).
- Form 16 (salary and TDS details).
- Bank account details, salary slips (for salaried individuals).
- Tax-saving investment proofs.
- Proof of capital gains (purchase/sale deed, mutual fund statements).
- Dividend income statements.
- Other documents like health insurance premium receipts, interest certificates, home loan payment receipts, etc.
4. Filing ITR for Capital Gains and Losses:
- Use ITR form 2 or 3, depending on eligibility.
- Capital gains are taxed when units are redeemed.
- Long-term losses set off against long-term gains; short-term losses can be set off against both long-term and short-term gains.
5. Steps to File ITR for Capital Gains:
- Visit the Income Tax Department's website, log in, and choose 'e-file.'
- Select the assessment year, form type, and reason for filing.
- Complete 'Schedule Capital Gains' for reporting short-term and long-term gains.
- Review and preview the return before validation.
- Verify ITR filing through either sending a signed ITR-V printout or electronic verification.
6. Capital Gains ITR Form:
- Short-term gains reported in Schedule CG; long-term gains exceeding Rs. 1 lakh in Schedule 112A.
- Specify the type of capital assets (equity shares or bonds) in the relevant schedule.
7. Mutual Fund Investment in ITR 1:
- Individuals with income below Rs. 50 lakh, usually filing ITR 1.
- Mutual fund investments need not be mentioned unless redeemed in the financial year.
8. Showing Mutual Fund Gains in ITR:
- Disclose dividend income in 'Schedule of Other Sources.'
- Report dividend income quarterly in the ITR form.
By following these steps and understanding the nuances of mutual fund taxation, individuals can ensure efficient financial planning and accurate filing of income tax returns for capital gains earned from mutual funds.
