Many of us would have dipped into our mutual fund (MF) investments before March 31; the end of the financial year 2019-20. But withdrawals from MFs attract tax. Here’s what you should know about how gains are taxed.

Are dividends and capital gains taxed?

Budget 2020 made dividends taxable. However, for the year (FY) 2019-20, dividends are tax-free. So, if you’ve earned dividends till March 31, 2020, then your dividends were tax-free in your hands. However, your fund house would have paid dividend distribution tax (DDT) of 29.12 percent, including tax and surcharge in the case of a debt fund and 11.648 percent for an equity fund. The same should however be reported under Schedule-EI of the relevant ITR of AY (Assessment Year) 2020-21.

Now, in the current financial year (FY 2020-21), you would need to add dividends earned to your income and it would be taxed as per your slab.

Sale proceeds from mutual funds are also taxed, depending on how long you’ve held on to your MF units. For equity funds, if you sell your units within one year, it is termed as short-term capital gains (STCG) and taxed at 10 percent. If you sell your equity fund units after a year, then that is long-term capital gains (LTCG) and taxed at 15 percent.

For debt funds, the threshold is three years. Units sold within three years will attract STCG tax, which is your normal bracket. Any LTCG from your debt fund units are taxed at 20 percent with indexation benefits.

How to report MF gains and losses?

Several taxpayers treat gains or losses from the sale of shares/MFs as ‘income from capital gains,’ while others treat it as ‘business income.’ CBDT (Central Board of Direct Taxes) has issued a circular giving a choice to the taxpayers of how they want to treat such income. “Once the taxpayer selects an option, he/she must continue with the same method in subsequent years also,” says Rahul Garg, senior tax partner, PwC India.

If the individual selects ‘business income’ then such income is to be reported in Schedule BP of the ITR form. Alternatively, if an individual opts for capital gains, then such transactions should be reported in Schedule CG of the ITR form.

I have bought and sold many MF units in the past year, including systematic investment plans (SIPs) and systematic transfer plans (STPs). Is it possible to get a concise report of all my mutual transactions?

Fortunately, registrar & transfer (R&T) agents offer help. Computer Age Management Services (CAMS), one of India’s largest R&Ts offers various such reports on its website that give you details of your capital gains, dividend income returned and so on.

You do not need to submit scheme-wise details of your dividend or capital gains income. But segregate income earned from equity-oriented schemes and debt schemes, because both these categories attract different tax rates. “However, it will be prudent for people to preserve these documents in case the tax officer asks for such documents or requests for a clarification about the transactions reported in the returns,” PwC’s Garg says.

What happens if the individual incurs losses in an equity or debt fund? Can he/she set it off against other heads or claim deductions? Where should he/she report it in the ITR?

Any loss arising from transfer of units of mutual funds can be of two types—short-term capital loss and long-term capital loss. Long-term capital loss can be adjusted only against LTCG whereas short-term capital loss can be adjusted against short-term as well as long-term capital gains. “If the loss cannot be set off or adjusted in the same year, then the unadjusted capital loss can be carried forward for 8 years and set off only against income from capital gains, provided the return of income in which loss is incurred is filed on or before the due date of filing the return,” PwC’s Garg says. The amount of loss shall be auto-populated under relevant the schedules of ITR such as Schedule CG, Schedule CYLA, Schedule CFL and Part B-TI.

Should the individual report each and every transaction involved in selling of MF units in the ITR?

In the case of short-term capital gains (STCG), there is no requirement of reporting each and every transaction involved in selling of MF units. For long-term capital gains (LTCG), the scrip wise details in the return of income for FY 2019-20 should be filled up as they are eligible for the benefit of grandfathering.

The Finance Act 2018 grandfathered the investments made in listed equity-oriented MFs on or before 31-01-2018 as the LTCG arising from the sale of such units were previously exempt from tax. “The scrip-wise reporting is required (under Schedule 112A) only in respect of long-term capital gain arising from transfer of listed equity oriented mutual funds acquired before 01.02.2018,” says Naveen Wadhwa, deputy general manager, Research and Development, Taxmann Publications, a leading publisher on taxation and corporate laws.

“In any other case, the aggregate amount of capital gain arising from transfer of units of mutual funds can be reported in Schedule CG,” he says. “In case you had invested in the MF through systematic investment plans (SIP) route, the holding period for each such SIP will have to be calculated separately,” Garg says.