Income Tax on Debt Funds in India

What are Debt Funds?

If you have invested in Mutual Funds, you need to file your ITR and pay tax on this income. Trading in various types of MFs has become very easy due to the availability of online trading platforms. Under Income Tax, trading in Debt Mutual Funds is classified as a Capital Gains Income.

  • Debt MFs – 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.
  • Equity Mutual Funds – Equity oriented MFs 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.
ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]
ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]

Income Heads for Income from Debt Funds

Capital Gains on Debt Funds

Debt Funds – Since these MFs invest in debt instruments, the treatment is similar to other capital assets.

  • LTCG: Any gain arising on the sale or redemption of a debt fund held for more than 36 months is considered as LTCG.
  • STCG: Any gain arising on the sale or redemption of a debt fund held for less than 36 months is considered as STCG.

Debt Fund Taxation

The taxability of MFs would depend upon the nature of income. Capital Gains on Debt Mutual Funds are taxable as per the table below.

Type of MF Period of Holding Long Term Capital Gain Short Term Capital Gain
Debt Fund 36 months 20% with Indexation Slab Rates

Other Income from Debt Mutual Funds is taxable in the following manner:

  • Dividend Income – Exempt up to FY 2019-20. Taxable at slab rates FY 2020-21 onwards.
Have any questions ?
Have any queries for trading income, ask us on TaxQnA and we will answer it in the simplest way!
Have any questions ?
Have any queries for trading income, ask us on TaxQnA and we will answer it in the simplest way!

ITR Form, Due Date and Tax Audit Applicability for Investors

  • ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
Tip
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
  • Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
Income Tax Calendar
Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
Explore
Income Tax Calendar
Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
Explore

Carry Forward Loss for Debt MFs Trading

  • 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.

Example

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 Debt Mutual Funds and Long Term Capital Gain of INR 2,50,000 from Equity Shares.

Now in the above example, Vijay needs to file ITR-2 for FY 2020-21. And his total income and tax liability will be as follows:

Particulars Amount (INR) Amount (INR)
Salary Income   870000
Capital Gains    
Short Term Capital Loss (30000)  
Long Term Capital Gain 250000  
Less: Exemption u/s 112A (100000)  
Taxable Long Term Capital Gain 150000  
Total Capital Gains after set-off of losses (taxed @10%)   120000
Total Taxable Income   990000
Tax at slab rate 86500  
Tax at special rate 12000  
Total Income Tax   98500
Health & Education Cess @4%   3940
Total Tax Liability   102440
Import Your Trades
File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Import Your Trades

File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

FAQs

How do I report income from trading in Debt Mutual Funds in the Income Tax Return (ITR)?

A trader should file ITR-2 and report income from trading in Debt Mutual Funds as Capital Gains.
Tax on LTCG – 20% with indexation
Tax on STCG – 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.

What is Indexation benefit?

Using the Indexation benefit, the taxpayer can adjust the Cost of Acquisition of the capital asset after considering the effect of inflation. Indexation is calculated using the CII (Cost Inflation Index) issued by the Income Tax Department. The taxpayer is allowed to calculate the indexed cost of acquisition to calculated capital gain on redemption of debt mutual funds. Indexation increases the cost of acquisition and thus lowers capital gains and tax liability.

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