If you have invested in Mutual Funds, you need to file your ITR and pay tax on this income. Trading in various types of mutual funds has become very easy due to the availability of online trading platforms. Under Income Tax, trading in mutual funds is classified as a Capital Gains Income.
Equity Mutual Funds – Equity oriented Mutual Funds are funds that invest in equity instruments. Types of equity mutual funds include large-cap funds, mid-cap funds, small-cap funds, ELSS (Equity Linked Savings Schemes), Index funds, etc.
Debt Mutual Funds – Debt Mutual Funds are funds that invest in fixed income securities like bonds, treasury bills, and other debt instruments. Types of debt mutual funds include liquid funds, short-term funds, income funds, hybrid funds, etc.
Open-ended schemes: This scheme doesn’t have a fixed maturity period. Investors can buy and sell directly at any time in this scheme.
Closed-ended scheme: This scheme has a stipulated maturity period. In this scheme, the investor can directly invest at the time of the initial issue. Once they are listed on the stock exchange, the investor can buy and sell these units.
Interval scheme: this scheme has the combined advantage of open-ended as well as close-ended schemes. Investors can trade at predetermined intervals.
Based on investment objectives
Growth Schemes: Most importantly the aim of this scheme is to provide capital appreciation. These schemes generally invest in equities and are ready to bear short-term loss to gain in the long run.
Income Schemes: These schemes provide a steady flow of income to its investors. It will generally tend to invest in bonds and stocks.
Balanced Schemes: These schemes aim to provide the combined benefits of Growth schemes and income schemes. They invest in shares and fixed income securities in the proportion indicated in their offer documents.
Money Market Schemes: This is suitable for investors looking to utilize their surplus funds for a short period of time while searching for better options. These schemes invest in short-term debt instruments and try to provide reasonable returns for the investors.
Tax saving scheme: These schemes offer tax benefits to investors. The government offers tax incentives for investment in specific instruments. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.
Sector Funds: Sector funds are for investors with the main objective to invest only in the equity of the companies existing in a specific sector, as mentioned in the fund’s offer document. For example, a technology fund will invest in software companies like Infosys Technologies, Satyam Computers, etc.
Index Funds: A fund that tries and works on the performance of a specific Index as BSE Sensex or NSE 50.
Tax on Equity Mutual Fund
Taxability of Mutual Funds would depend upon the nature of income. Capital Gains on mutual funds is taxable as per the table below.
Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. Remaining loss can be carried forward for 8 years and set off against LTCG only.
Mr. Vijay is a salaried individual and has done mutual fund trading in FY 2020-21. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of INR 30,000 from sale of equity shares and Long Term Capital Gain of INR 2,50,000 from Equity Mutual Funds. Dividend Income of INR 50,000 in FY 2020-21.
Now in the above example, Vijay needs to file ITR-2 for FY 2019-20. And his total income and tax liability will be as follows:
Short Term Capital Loss
Long Term Capital Gain
Less: Exemption u/s 112A
Taxable Long Term Capital Gain
Total Capital Gains after set-off of losses (taxed @10%)
How do I report income from trading in Mutual Funds in the Income Tax Return i.e. ITR?
A trader should file ITR-2 and report income from trading in Mutual Funds as Capital Gains. – Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%. – Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates. The trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.
Is Dividend earned on Mutual Funds taxable?
Yes. The dividend income earned on Equity Mutual Funds which was earlier exempt is now a taxable income. – Dividend up to FY 2019-20 – exempt – Dividend FY 2020-21 onwards – taxable at slab rates. The amount in excess of INR 5,000 is liable for deduction of TDS under Sec 194K at 10%.
Is Mutual Fund taxable?
Yes. Income from Mutual Fund is taxable under the Income Tax Act. (a) Capital Gain on Sale of Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%. (b) Capital Gain on Sale of Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates (c) Dividend Income on Mutual Funds – Taxable at slab rates from FY 2020-21 (d) Interest Income on Mutual Funds – Taxable at slab rates