Whether you are a self-employed professional or a salaried employee, you must disclose your investments when you file your income tax returns (ITR). You must file an ITR and pay income tax if you have mutual fund investments as mutual fund trading is categorised as a capital gains income for income tax purposes.
How to disclose income from mutual funds in ITR?
As there is no provision in ITR-1 for the disclosure of capital gains, a salaried taxpayer will not be able to file an ITR-1 after redeeming MF units, regardless of whether there was a short-term or long-term gain. Instead, you must disclose the profit or loss in the Capital Gain pages of the ITR-2 Form.
Things to keep in mind while filing ITR for mutual fund returns
Keep your documents ready
Incorporate the transactional proofs of your mutual fund schemes before completing Form 2. You don’t have to upload each of these statements to the site, so don’t worry. You must, however, only compute the total earnings from redeemed funds.
You are not required to pay tax on your long-term capital gains (LTCG) or redemption value from all mutual funds if the total less than Rs. 1 lakh. A 10% tax will be applied to any redemption sum with long-term capital gains over Rs. 1 lakh.
In addition to disclosing your mutual funds return in ITR, you can use Form 2 to request a tax reduction. If you have yet to tell your employer about your investments and demand a tax deduction, that is.
Get the right form
You will find seven forms when you log into the ITR e-filing portal. If you are a salaried person with no capital gains or losses, choose Form 1 from among these. However, select Form 2 if you are a salaried individual or HUF with capital gains or losses. You must choose Form 2 to report your gains or losses, even if you sold all of your mutual funds during any given year.
Salaried people frequently worry about including the mutual fund assets in ITR-1 when filling out the income tax returns. Since ITR-1, which salaried individuals often use to file the income tax returns, does not have a provision for disclosing capital gains after redeeming mutual fund units, there is no formal requirement to do so.
Gains are not taxable until realised, even if the investment’s value has increased.
Tax rules on the incomes of MF investments
Dividend
Any dividends received, whether from debt funds or equity funds, are subject to taxation. Dividends increase your income from other sources. A salaried taxpayer may report dividends received in ITR-1 under Income from Other Sources.
Short-term capital gains
Equity and debt funds have different tax laws and holding periods for short-term gains.
Debt funds
Units of debt-oriented mutual fund plans redeemed within 36 months of the purchase are treated as short-term capital gains. Such gains are included in your total income and taxed appropriately.
Equity funds
Long-term capital gains are gains on redemption made more than a year after the purchase date of the units in equity-oriented MF schemes. Such gains, which exceed Rs 1 lakh in a fiscal year, are subject to a 10% flat tax with no indexation.
Conclusion
You can submit the ITR once all the other information has been entered. Remember to verify the ITR because doing so is necessary for submitting taxes.
Alternatively, you can provide your employer with information about your other sources of income and ask them to deduct more tax from your paycheck to account for those additional sources of income as well. If you choose the second option, you will avoid the headache of having to pay advance tax and interest if there is a delay or default in advance tax payment.
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