If you have exited some mutual funds during the year, you would have made capital gains or losses. You ought to report it in your ITR filings, even if there are no tax liabilities. Concealing or misreporting can invite attention from the tax authorities.
What is a capital gain?
Capital gain usually arises when you sell a fund at a higher NAV than what you invested at.
If you sell an equity-oriented fund within a year, short-term capital gains (STCG) taxes @ 15.6% (15% + 4% cess) is applicable. If you hold it for more than a year, long-term capital gains (LTCG) @ 10.4% are applicable.
No tax is deducted at source by the mutual funds for capital gains and investor is therefore liable to pay taxes, if any.
Long and short
However, LTCG up to Rs 1 lakh in a financial year is exempt from taxes while a grandfathering clause ensures that tax is prospective in nature. Higher of the sales proceeds or the fair market value (NAV as on Jan 31, 2018) is considered as the cost of acquisition for taxation purposes.
Let’s say you invested Rs 1 lakh in an equity fund in 2015-16 at a NAV of Rs 100 per unit. And now, its NAV has gone up to Rs 140, while its NAV on Jan 31, 2018 was Rs 120. For the purpose of LTCG, higher of Rs 100 and Rs 120 is taken as cost of acquisition per unit. Accordingly, LTCG works out to Rs 20,000 ((140-120)*1000 units). If there are no other gains, it will be fully exempt from taxes for the year.
In case of debt funds, LTCG at the rate of 20.8 percent is applicable, if units are sold after three years of buying. Moreover, you can avail of indexation benefits. For calculating inflation-adjusted cost (with indexation benefits that is) for your debt schemes, you need to multiply its cost of acquisition by the ratio of index values existing during the year of sale and purchase respectively (see graph).
If it is sold within three years, STCG is chargeable at your tax slab rate (31.2% for those in the highest tax bracket).
A capital gain can be set-off (netted) against a capital loss made during the year. You can set-off gains of a debt fund against that of equity fund loss or vice-versa.
However, set-off rules for long-term capital loss and short-term capital loss are different. Short-term capital loss can be set-off against both LTCG and STCG. However, long-term capital loss can be set-off only against LTCG.
Also, you can carry forward unadjusted losses after separating them into short-term and long-term capital losses for up to eight subsequent years.
How to go about filing it?
If you earn a salary and have a capital gain or loss, you need to choose ITR-2 form. In part B section of the form containing total income, there is a separate head for capital gains, where you need to separately report the net STCG as well as LTCG for debt and equity schemes.
To arrive at it, you need the following:
1. Statement of redemptions for FY 2019-20 of the concerned funds. This will list all your mutual fund redemptions, date of sale, date of purchase, the price received, the price paid and so on
2. ISIN(12-dight digital security code) of the fund
You can log in to the mutual fund account of various fund houses to get these statements.
Under the schedule 112A of the form, you need to key-in the following details of each of the schemes sold.
1. ISIN code
2. Name of the scheme
3. No. of units
4. Sale price per unit
5. Sale value
6. Cost of acquisition (also without indexation)
7. Fair market value per unit and overall value (NAV as on 31st Jan 2018)
8. Expenditure incurred in connection with the transfer
Most of the above details including that of actual tax liability are usually computed in the fund statements itself.
If you are a Scripbox investor, log in and simply download the consolidated capital gains statement from ‘Account statements’ and by selecting 'capital gains' and then ‘realised capital gains’.
Once you have details at the individual fund level, you need to segregate short-term and long-term gains or losses for debt and equity schemes and subsequently find the consolidated position. The net capital gains, if any, are taxed according to the above-mentioned criteria.
You need to report capital gains in your tax filings if you have sold funds during the year. By availing set-offs and carry-forward of losses, you can reduce tax liabilities.