With companies starting to issue Form 16 to their employees, many individuals have begun the process of filing the income tax return (ITR) for the financial year 2019-20. If you are among those who have redeemed mutual funds during the year, you shouldn’t forget to add the details of capital gains or losses incurred in ITR. Moreover, even if you have reinvested the amount in mutual funds, it is important to disclose the details, as reinvestment basically means sales of mutual funds and a subsequent new purchase.
Let’s understand how capital gains tax is applicable on the redemption of mutual funds and why you should report the same in your ITR.
Capital gains on mutual funds
Mutual fund taxation differs on the basis of the type of mutual fund (equity or debt oriented) and the period of holding. Gains from the sale of equity mutual funds held for less than a year are considered as short-term capital gains (STCG) and are taxed at 15%. While if you redeem your mutual fund after a year, gains above ₹1 lakh are taxed at the rate of 10%.
In case of the debt funds, the gains incurred on the sale of a mutual fund before three years are considered short-term and are added to the income and taxed as per slab, while gains incurred after three years are taxed at the rate of 20% with indexation. Remember, if you had invested in the mutual fund through systematic investment plans (SIP), the holding period for each SIP will be calculated separately.
How set off capital losses
Not only the gains but even if you have incurred losses you should disclose the same in ITR, as you can set off these losses in the subsequent years.
“Capital losses in one year can be carried forward and set off against capital gains in another year. This can be done in eight successive years. For example, in FY20-21 if you have incurred a capital loss on the sale of mutual funds and disclosed it in ITR, the next year if you sell other mutual funds and earns capital gains, you can set off the gains with past years losses and reduce your tax liability. However, you will only be able to carry forward these losses if you file ITR in the prescribed time,” said Vivek Jalan, partner, Tax Connect Advisory Services LLP, a Kolkata-based tax advisory firm.
“In case of carrying forward capital losses, it is necessary to file a tax return within the due date. Do note that short-term capital losses from the sale of mutual funds can be set off against any taxable short-term capital gains or long-term capital gains while long-term capital losses can be set off only from a long-term capital gains,” said Archit Gupta, founder and CEO, ClearTax.
Apart from this, you can deduct the brokerage paid as expenses while calculating capital gains. “The taxpayer can claim the cost of acquisition and brokerage as a deduction,” Gupta added.
Which ITR to file?
An individual having salaried income and income from capital gains is required to file ITR-2. “Individuals having income from business and profession as well as capital gains will have to use ITR-3 to file their tax return,” said Aarti Raote, partner, Deloitte India.
Generally, the details to be disclosed in ITR are the date of sale and purchase, the purchase amount, sales consideration and transfer expenses, among others.
So, make sure you disclose all the details while filing your ITR. Take help of a chartered accountant, in case you are unable to file the return on your own. The last date for filing ITR for FY19-20 has been extended till November.