Taxation is a chore for many. But it is an essential part of our system that supports our government to run our country efficiently. Unfortunately, due to the same reason, avoiding taxes can bring trouble. This is important to understand because many people are unaware of taxation regarding their investments. While some investments take care of themselves as taxes are levied at source, in some cases, you have to show the returns in your report and pay the appropriate tax. But what is the case of mutual funds here? Let us find out.
Taxation of mutual funds
Mutual funds are taxed according to the portfolio they have. If your fund has a portfolio with more than 65% of equities, then it is considered an equity fund. If you sell your equity fund units in less than a year, you’ll owe taxes of 15% plus a 4% cess on any short-term capital gains. If you realize a gain of more than Rs. 1,000,000 in a financial year, they will be subject to a 10% tax rate plus and 4% cess. All long-term capital gains up to Rs 1,000,000 are exempt from taxation.
All debt fund short-term capital gains are included in your taxable income and taxed at your marginal income tax rate. The appropriate cess and surcharge must also be included in the total. You must pay a fixed 20% tax rate on long-term capital gains from a debt fund.
When is tax paid on mutual fund returns?
If you don’t sell any of your mutual fund shares throughout the financial year, you won’t owe any taxes on the gains. Gains on investments are not taxed until they are withdrawn from the account. Gains from a mutual fund are taxed as capital gains only in the year they are realized or redeemed. In addition, it is not strictly necessary to mention it in ITR-1 since there is no provision in ITR-1 to reveal capital gains after redeeming mutual fund units, typically used by salaried persons when submitting income tax returns.
If you withdraw money from your investment in a mutual fund during the current financial year, you must submit your return using form ITR-2. No matter whether the gain originated from a debt fund or an equity fund or was a gain that was either long-term or short-term, you are required to report any gain or loss on the Capital Gain pages of the ITR-2 Form rather than on the ITR-1 Form. This is true regardless of the gain’s duration. Page 112A of the ITR-2 is dedicated only to reporting capital gains and losses from selling equity-oriented mutual fund schemes.
The above taxation rules are not exclusive to mutual funds alone and are common to most investment options. At the same time, it is a good idea to talk to a tax expert to ensure you are clear about the nuances each investment option’s taxation may carry.