Last Updated on May 24, 2022 by Anjali Chourasiya

Filing Income Tax Returns (ITR) is your federal duty if you earn an income in the financial year exceeding Rs. 2.5 lakh. When filing your returns, you have to declare incomes earned from various sources. If you have made specific investments that earn you tax deductions or exemptions, the same should be declared in the ITR.

Mutual fund investments also give you tax benefits if you choose the ELSS schemes. Moreover, when you redeem your investment and gain profit or suffer a loss, the same should also be reported on your tax return. Let’s understand how to declare mutual fund investment in ITR.

Declaring tax-eligible mutual fund investment

Equity Linked Saving Schemes, or ELSS, are equity-oriented mutual fund schemes with a distinct tax advantage. Investment into these schemes allows you a deduction from your taxable income to the tune of Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961, that you may declare under the heading ‘Chapter VI A deductions’ in your ITR.

Declaring capital gains on mutual fund redemption

Whenever you redeem your mutual fund investments, any profit or loss incurred is termed as capital gain or capital loss, respectively. The detail of such gains or losses should also be declared in your ITR.

However, before jumping on how to declare capital gains from mutual funds, here’s a quick look at how the gains are taxed:

  • In the case of equity mutual funds, gains earned within 12 mth are called short-term capital gains. Such gains are taxed at 15%. On the other hand, gains earned after 12 mth are long-term capital gains. Such gains are tax-free up to Rs. 1 lakh, and gains exceeding the limit are taxed @10%.
  • In the case of debt mutual funds, gains earned within 36 mth are called short-term capital gains. They are taxed at your income tax slab rates. However, gains earned after 36 mth are called long-term capital gains. They are taxed at 20% with indexation, a process through which an asset’s acquisition cost is inflated/adjusted to bring it at par with current rates, taking inflation into account.

How to declare capital gains from mutual funds?

Now that you know how mutual fund gains are taxed, it’s time for step two, which is how to declare mutual fund investment in ITR.

Since mutual fund returns are called capital gains, they are recorded under the heading ‘Income from capital gains.’ You need to mention the amount of gain incurred and the respective tax liability. 

Similarly, losses on redemption should be declared as capital losses under the same heading. You can use the losses to set off the profits earned from other mutual fund investments.

When calculating the amount of capital gains, you can deduct the brokerage paid to your mutual fund distributor or broker, if any, from the gains incurred.

Setting off of capital loss from gains on redemption of the fund

If you have incurred a capital loss in the financial year, then on redeeming your mutual fund investments, you can use the loss to offset the profits earned on another scheme. This set-off is allowed in the same financial year as well as for eight subsequent financial years. To offset your capital losses against gains and reduce your subsequent tax liability, you should file your ITR with the income tax department within the due date. Failure to do so would not allow you to carry forward your losses for set-offs from future capital gains.

Here are the rules of setting off losses against gains:

  • Short term capital loss can be set off against either short term or long term capital gains
  • Long term capital loss can be set off only against long term capital gains

ITR form 2

You would have to file your returns in ITR Form 2 if you have:

  • Capital gains or losses from a mutual fund redemption
  • You are a salaried taxpayer or a Hindu Undivided Family (HUF)

In this form, the details of the capital gains or losses suffered would have to be mentioned.

Suppose you incur capital gains or losses from an equity mutual fund on which Securities Transaction Tax (STT) has been paid. Then, in that case, you need to mention the individual details of every mutual fund scheme redeemed. 

You will also need to fill out Schedule 112A for each scheme that you have redeemed in a financial year and on which you have earned a capital gain or loss.

The bottom line

If you have invested in tax-saving ELSS schemes, you may claim a tax deduction when you declare your investment in your Income Tax Returns (ITR). Moreover, any gains or losses incurred on redeeming an existing mutual fund investment should also be declared in the ITR. Understand thoroughly how to declare mutual fund investment in ITR so that you can comply with the rules of filing your returns and avoid penalties. Also, file your return on time to fulfil your duty and carry forward your losses to subsequent financial years if you have any.

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