ITR Filing FY2024-25: Sold Mutual Funds? Know How Capital Gains Tax Will Apply
One of the major confusions among taxpayers is regarding the capital gains tax on mutual funds. CA explains how to report them while filing ITR FY2024-25.
Tax Rate Of Capital Gains From Mutual Funds: The income tax filing season for FY2024-25 (Assessment year FY 2025-26) is currently underway. The tax department has made several changes, including pre-filled and easier compliance, to make the filing process easier. The taxation terminology still confuses common taxpayers who are looking to file their ITR without the need of CA or tax expert.
One of the major confusions among taxpayers is regarding the capital gains tax on mutual funds. Due to various technicalities including short-term and long-term and equity and debt, taxpayers find themselves on the brink of a steep cliff, unable to calculate the true liabilities of the capital gains from mutual funds.
Prior knowledge to understand how the capital gains work on mutual funds is much better than receiving tax notices from the tax department for erroneous or faulty filing.
CA Suresh Surana explains how capital gains from mutual funds are taxed and what you need to know while filing your ITR for FY2024-25.
The capital gains tax on mutual funds would depend on the nature or type of mutual fund, period of holding etc.
Taxation on Equity Mutual Funds
An equity mutual fund is one where at least 65% of the portfolio is invested in equity shares of domestic companies. The sale of units would be categorized into long term and short term gains depending upon the period of holding of such units. The period of holding of such units would be from the date of acquisition to the sale date. If the units of listed equity mutual funds are held for more than 12 months before the sale, the gains derived would be long-term capital gains in nature otherwise, short term capital gains.
The short-term capital gains would be taxed at the rate of 15% (enhanced to 20% w.e.f. 23rd July 2024) u/s 111A of the Income Tax Act ('IT Act').
• Long-Term Capital Gains (LTCG):
The long-term capital gains are taxed at 10% (enhanced to 12.5% w.e.f. 23rd July 2024) u/s 112A of the IT Act provided such long-term capital gains exceed the threshold limit of Rs. 1.25 lakh in a financial year (previously Rs. 1 lakh prior to Finance (No. 2) Act 2024).
Taxation on Debt Mutual Funds
Similar to the taxation of Equity Mutual funds, the taxation of Debt mutual funds also depends upon whether the units are long term or short term based on their period of holding. However, in this case, the gains are categorized as short term, if the units are sold within 36 months (24 months to be considered if sold on or after 23rd July 2024), otherwise would be categorized as long term.
• Short-Term Capital Gains (STCG):
Short term capital gains would be taxed at the applicable marginal slab rate of the investor.
• Long-Term Capital Gains (LTCG):
The Long term capital gains of debt fund are taxed at 20% with indexation (12.5% without indexation w.e.f. 23rd July 2024) u/s 112 of the Act.
In case of any specified mutual funds (where not more than 35% of its total proceeds is invested in equity shares of domestic companies) acquired on or after 1st April 2023, the gains derived from the said mutual funds would be deemed to be short term capital gains u/s 50AA of the IT Act and accordingly subject to tax as per the applicable marginal slab rates applicable to the investor/ taxpayer.
*Note: W.e.f. 1st April 2025, 'Specified Mutual Fund" shall mean a mutual fund:
(a) a Mutual Fund by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments; or
(b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in sub-clause (a)
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