Which ITR Form to fill out for income from Mutual Funds?

For an investor, Mutual funds are an alternate way of investing in the share market for the long term. Other than investing directly in equity, mutual funds diversify the total investment and bring an average return on investment over some time. These are considered a less risky option than stocks or bonds where the total amount is distributed in a pool of assets by the fund manager controlling the fund. Where the fund manager is performing his role to bring the highest return possible, it becomes essential for the investor to take care of its timely withdrawal and Income tax implications. Knowing which ITR form to fill out for Income from Mutual funds, the taxpayer has to report his gains or losses from these funds to the Income tax department.

Here, in this article, you will get to know more about which ITR form to fill out for income from mutual funds and the applicable tax.

How do your Invest in Mutual Funds?

Entry to mutual fund investment can be done through multiple options by visiting the official fund house for investment, through a broker like Angel One, Groww, or Zerodha, or through the official website of the fund managing company.

Investment in mutual funds can be done in a (Systematic Investment Plan) SIP form where investment is made in weekly, monthly, or quarterly installments or can be done by paying a lump sump amount to the fund for long-term growth and returns.

Disclosure of Incomes from Mutual Fund Investments in Income Tax Return: 

For a salaried person or any individual taxpayer, deduction of SIP towards a mutual fund every month does not attract any Income tax compliances. At the same time, Income tax has to be paid on certain incomes received from investments in mutual funds every year including Income from Dividends, Short term gains, or Long term redemption gains on Mutual funds in a particular year.

  1. Income from Dividend: Reporting of income from Dividends received from the mutual fund company is to be done under ” Income from Other Sources ”where the amount of Dividend received from the company after TDS deduction is to be reported under the ” Schedule of Other Sources of Income ” in the respective applicable tax form. The TDS amount can be claimed under the ”TDS other than salary section ” in the ITR form.
  2. Short-Term Gains from Mutual Funds: The amount of gains received as a short-term from mutual funds redemption depends on the holding duration of the funds/units of mutual funds. The short-term gains are subject to be charged at the rate of 15 percent on incomes. The number of short-term gains are to be reported under the Schedule Capital Gain of the ITR Form applicable.
  3. Income from Long-Term Gains: The number of gains or returns realized from mutual funds redemption for over 12 months, the gains are subject to tax at a specific rate of 10%. As per Section 112A, gains up to 1 lakh shall be exempted and more than 1 lakh have to be reported under Schedule 112A of the respective tax form applicable.

Which ITR Form to fill out for Income from Mutual Funds?

The type of ITR form applicable for reporting income from mutual fund or related investments also depends on the other income sources and the applicable tax sections on the assessee. Choosing which ITR form to fill out for income from Mutual Funds out of 7 ITR forms can be a challenging task, as for an individual either a salaried person or having income from business or profession there can be other multiple sources of income to report other than mutual fund income. For those with income from Business and profession and from mutual funds, ITR Form 3 can be used to report gains and profits from mutual fund investments.

For salaried individual withholding income from Salary, HRA, Commission, and other sources, the appropriate ITR form for reporting income from Mutual fund could be ITR 2 other than ITR 1 form. For NRIs investing in mutual funds in India, the ITR Form 2 or ITR Form 3 can be used for reporting.

Important Tax Sections for Income from Mutual Funds

For choosing which ITR form to fill out for Income from a mutual fund, the applicable tax sections and deductions shall also have to be considered. The following Income tax sections for mutual funds shall be essentially considered before filing an ITR form with income from mutual funds:

  1. Section 111A – Reporting of STCG
  2. Section 112 / 112A – Reporting of LTCG on Shares / Securities / Investments
  3. Section 70 – Carry Forward of Losses
  4. Section 80 – Available Deductions to the Taxpayer.
  5. Section 194K – TDS on Mutual Funds
  6. Section 196A – Restriction of Deduction for Income from Mutual Funds.

Other than resident Indian taxpayers, the tax compliance on NRIs for filling of ITR reporting income from mutual funds is alike.

For consultation on LTCG / STCG implications on your mutual fund’s investments or crypto investment in India, you can drop us an email atinfo@taxreturnwala.com