Making long-term investments in equities through Systematic Investment Plans (SIPs) in mutual fund schemes is a considerably less hazardous route. However, once they have redeemed their assets, they are faced with the arduous chore of inputting investment-by-investment information of long-term capital gain (LTCG) in their Income Tax Return (ITR).
Capital gains come from the redemption, changeover, or change of plan of such MF units. Short-term capital gain (STCG) or loss results from transactions in equity mutual funds units made within one year of the investment date, whereas long-term capital gain (LTCG) or loss results from transactions made beyond one year.
Mutual funds might also save you money on taxes. Since the interest is allocated to your taxable income and taxed at your income tax slab rate, fixed deposits have a considerable disadvantage, especially if you are in the highest tax bracket. Mutual funds are particularly strong in this area. When you invest in a mutual fund, you get expert financial advice and tax-efficient returns.
How do you earn returns in Mutual Funds?
Mutual funds offer two sorts of returns: dividends and capital gains. Dividends are paid out of the company’s profits, assuming there are any. When a company has extra cash, it may opt to pay dividends to its shareholders. Investors receive dividends in proportion to the quantity of mutual fund units they own.
A capital gain occurs when the selling price of a security that an investor owns exceeds the purchase price. When the price of mutual fund units rises, capital gains are realised. In the hands of mutual fund investors, dividends and capital gains are equally taxable.
Documents needed for filing ITR
You will require a capital gains statement and documents such as Form 26AS (which provides the information of the tax previously deducted and submitted with the tax department), Form 16 (which you will receive from your employer), and an interest certificate. You could acquire it from a fund firm if you invested directly with them.
Which ITR Form to choose?
In total, there are roughly 7 ITR kinds. The ITR Form you choose is determined by the type of income you earned in the previous year. Individual taxpayers can file ITRs in the ITR 1 to ITR 4 categories. If you have capital gains or losses during the year, you must declare them on Forms ITR-2 and ITR-3.
As a result, a salaried individual who usually is eligible to file an ITR-1 return must pick ITR-2 to report capital gains. If the taxpayer has income from a business or profession, he can file an ITR 3 return.
If a person with business or professional income has to record capital gains or losses throughout the year, he must submit ITR 3.
Steps for filing ITR
1. Go to https://www.incometax.gov.in/ to access the new tax site.
2. Use your PAN card to access the portal.
3. Double-check or add your bank account information if you’re using the portal for the first time.
4. Select the File Return option. You must then select 2021-22 as the assessment year.
5. Next, locate the appropriate ITR form and begin filing it.
Mutual Funds Captial Gains You Need to Show in ITR
Mutual funds earn money in two ways: capital gains and dividends, which must be reported on the ITR. Let’s start by figuring out which ITR form you could use if you earned money from these sources during the year.
Taxation of Dividend Income
Previously, mutual fund dividends were tax-free in the hands of mutual fund unitholders, but now they are taxable and must be recorded as “Income From Other Sources.” Dividends from equity-oriented mutual funds are taxed in the hands of personal taxpayers at slab rates.
An investor can claim a deduction of up to 20% of the total dividend income for interest expenses incurred to generate that dividend income. Any other expenses, such as commission or pay paid to a banker or other person to realise such a dividend, are not deductible.
Showing Capital Losses or Gains
The price at which an investor buys mutual fund units and the price where these units are sold or redeemed is known as capital gains or losses.
Capital gains occur when a mutual fund is sold for a profit. If the sale price is much less than the purchase price, the resulting losses are capital losses. The tax is attracted when earnings are realised from selling a mutual fund.
The rate of taxation on these capital gains will be determined by whether they are short-term or long-term.
Conclusion
If you have not claimed a deduction while submitting an investment to your company, you can do so in the form here. Only the pension and ELSS categories of mutual funds are eligible for Section 80C deductions limited to Rs 1,50,000.
Remember that, aside from mutual funds, you must include them in the same XML form if you own other capital assets such as real estate, gold, or other precious metals and have profited from their sale. The income earned from renting out property must also be reported on the form.