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.
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 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:
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 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