ITR Filing AY 2025-26: Your Easy Guide to Mutual Fund Taxes in FY 2024-25

 

Good news first: you’ve got a bit more breathing room this year! The deadline for filing your ITR for FY 2024-25 (AY 2025-26) has been shifted to September 15, 2025, for most individual taxpayers. That’s a nice extension from the usual July 31st date, giving you extra time to get things right.

Understanding how your mutual fund gains and losses are taxed isn’t just about avoiding trouble; it’s about making sure you file accurately and, potentially, even saving a bit of money on taxes. So, let’s break down these changes in a way that’s easy to understand. No complex jargon, just clear information to help you out!

Big Changes on the Horizon: What Budget 2024 Means for Your Mutual Funds

Okay, let’s get straight to the point. The Union Budget 2024 brought some pretty big shake-ups for mutual fund taxation. These changes kicked in from July 23, 2024, which means if you bought or sold mutual fund units after this date in FY 2024-25, these new rules probably apply to you. These modifications affect both equity (stock-based) and debt (bond-based) mutual funds, changing how much tax you pay and even taking away some previous benefits.

Here’s a quick glance at the major shifts:

• Short-Term Capital Gains (STCG) on Equity Funds: This tax rate has jumped from 15% to 20%.
• Long-Term Capital Gains (LTCG) on Equity Funds: This one went from 10% to 12.5%.
• LTCG Exemption Limit: Good news here! The first ₹1 lakh of LTCG was tax-free, but now it’s been raised to ₹1.25 lakh annually.
• Indexation Benefits: This is a big one for debt fund investors. Indexation, which helped reduce your taxable gains by adjusting for inflation, has been removed for most asset classes, including debt mutual funds.

These changes are significant, so let’s dive into the details of how different types of mutual funds are now taxed.\

Also Read :–https://ipofront.in/securing-retirement-with-mutual-funds/

How Do Mutual Funds Get Classified for Tax? (It Matters!)

Before we talk about specific tax rates, it’s super important to understand how mutual funds are grouped for tax purposes. This classification directly impacts how your gains are taxed.

1. Equity-Oriented Mutual Funds

These are the funds that primarily invest in company stocks. To be considered an “equity-oriented” fund for tax purposes, at least 65% of its portfolio must be in equity shares of Indian companies.

This category includes many popular types of funds:

• Large-cap, Mid-cap, and Small-cap funds: These invest in companies of different sizes.
• Sectoral and Thematic funds: Funds focused on specific industries or investment themes.
• ELSS (Equity Linked Savings Scheme) funds: These are special funds that also help you save tax under Section 80C.
• Aggressive hybrid funds and balanced advantage funds: These typically have a higher allocation to equities (usually 65% or more).

2. Debt-Oriented Mutual Funds

These funds are all about stability, investing mostly in bonds, government securities, and other money market instruments. A fund is generally classified as a debt fund if it invests more than 65% of its assets in debt instruments.

3. Hybrid Mutual Funds

Hybrid funds are like the best of both worlds, mixing both equity and debt investments. Their tax treatment isn’t straightforward; it depends on how much they’ve invested in stocks:

• Equity-oriented hybrids (65% or more in equity): These are taxed just like equity funds.
• Debt-oriented hybrids (less than 65% in equity): These are taxed like debt funds.

So, always check the fund’s equity allocation percentage to know how it will be treated for tax purposes.

Diving Deeper: Taxation of Your Equity Mutual Fund Gains

Alright, let’s talk about the money you make from selling your equity mutual funds. This is where “short-term” and “long-term” really come into play.

Short-Term Capital Gains (STCG) on Equity Funds

If you sell your equity mutual fund units within 12 months of buying them, any profit you make is considered a Short-Term Capital Gain (STCG).

• New Tax Rate: For any sales made on or after July 23, 2024, the tax rate on STCG has gone up to 20% (it was 15% before).
• Special Section: This tax falls under Section 111A of the Income Tax Act.
• STT Applies: These gains are also subject to Securities Transaction Tax (STT), which is a small tax paid when you buy or sell equity-related instruments.

Long-Term Capital Gains (LTCG) on Equity Funds

If you hold onto your equity mutual fund units for more than 12 months before selling them, any profit is called a Long-Term Capital Gain (LTCG).

• New Tax Rate: For sales on or after July 23, 2024, the LTCG tax rate is now 12.5% (up from 10%).
• Tax-Free Exemption: Here’s a bit of good news: the first ₹1.25 lakh of LTCG in a financial year is completely tax-free! This limit was ₹1 lakh previously.
• Applicable Section: This is covered under Section 112A of the Income Tax Act.

Let’s Look at an Example:

Imagine you invested in an equity mutual fund. You sold the units after holding them for 18 months and made a profit (gain) of ₹2 lakh.

• First, you subtract the tax-free exemption: ₹2,00,000 – ₹1,25,000 = ₹75,000.
• So, your taxable LTCG is ₹75,000.
• Now, calculate the tax: ₹75,000 × 12.5% = ₹9,375. That’s your tax payable.

Pretty straightforward when you break it down, right?

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Taxation of Debt Mutual Funds: A Major Shift!

This is where Budget 2024 brought the most significant change. How your debt mutual funds are taxed now depends heavily on when you invested.

For Investments Made Before April 1, 2023

If you bought your debt mutual fund units before April 1, 2023, the old rules apply:

• Short-Term Capital Gains (holding period ≤36 months): Any profits are added to your regular income and taxed according to your personal income tax slab rate.
• Long-Term Capital Gains (holding period >36 months): These gains were taxed at 20% with indexation benefit. Indexation allowed you to adjust your purchase cost for inflation, significantly reducing your taxable gain.

Crucial Point: However, Budget 2024 removed indexation benefits for all debt mutual funds transferred (sold/redeemed) on or after July 23, 2024, regardless of when you invested them. This means if you sell old debt funds now, you might still face tax on the full gain without inflation adjustment.

For Investments Made On or After April 1, 2023

This is the big change! For any debt mutual fund units you buy on or after April 1, 2023, all gains are now treated as short-term capital gains, no matter how long you hold them.

• New Tax Rate: All gains from these investments will be added to your total income and taxed at your applicable income tax slab rate.
• Why the Change?: This came into effect with Section 50AA of the Finance Act 2023, aiming to bring debt mutual funds in line with fixed deposits for tax purposes.

This means debt funds purchased recently (since April 2023) no longer have the long-term tax advantage they once did.

How Hybrid Mutual Funds Fit In (Tax-wise)

Hybrid funds are unique because they blend equity and debt. Their tax treatment simply mirrors their dominant asset class:

• Equity-Oriented Hybrid Funds (65% or more equity):
  • STCG: 20% if held for less than 12 months.
  • LTCG: 12.5% if held for more than 12 months, with the ₹1.25 lakh annual exemption.
• Debt-Oriented Hybrid Funds (less than 65% equity):
  • These follow the taxation rules for debt mutual funds. If purchased after April 1, 2023, all gains are taxed at your slab rates.

Interestingly, Budget 2024 did offer a small silver lining: some specific hybrid funds saw their LTCG tax reduced to 12.5%, aligning them more closely with equity taxation if they meet certain criteria. It’s always good to check the specific fund’s details.

ELSS Funds: Your Tax-Saving Superstars (with a Catch)

ELSS (Equity Linked Savings Scheme) funds are pretty special because they offer a double whammy:

1. Investment Deduction

• You can claim a deduction of up to ₹1.5 lakh annually under Section 80C of the Income Tax Act by investing in ELSS.
• This can potentially save you up to ₹46,800 in taxes if you’re in the highest 30% tax bracket (plus cess).
• They come with a 3-year lock-in period, which is the shortest among all Section 80C investment options.

2. Capital Gains Taxation

Even though they have a 3-year lock-in, their gains are still treated like other equity funds:

• STCG: Technically 20%, but practically rare since you can’t sell before 3 years.
• LTCG: 12.5% on gains exceeding ₹1.25 lakh, just like other equity funds. So, you still get the LTCG tax benefit after the lock-in.

Also Read :–  https://ipofront.in/from-dividends-to-gains-understanding-mutual-fund-taxation/

What About Dividends? (The Money You Get Regularly)

If your mutual fund scheme pays out dividends, here’s how that’s taxed:

Current Rules (Post-2020)

Before 2020, mutual funds paid a Dividend Distribution Tax (DDT) before distributing dividends. Now, the rules are simpler:

• Taxable in Your Hands: Dividends from mutual funds are now fully taxable in the hands of the investor (that’s you!)
• Tax Rate: The tax rate depends on your individual income tax slab rate. The more you earn, the higher the tax on your dividends.
• TDS: If the total dividend you receive from a mutual fund house (across all schemes) exceeds ₹5,000 in a financial year, the fund house will deduct 10% as Tax Deducted at Source (TDS) before paying you.
• Reporting: You need to report any dividend income under the “Income from Other Sources” section in your ITR.

So, while dividends can be a nice bonus, remember they’re now a part of your taxable income.

Securities Transaction Tax (STT): A Small Price for Equity

Don’t worry too much about STT; it’s a small tax and only applies to certain types of mutual funds.

• Applies Only to Equity-Oriented Funds: STT is charged exclusively when you buy or sell equity-oriented mutual funds (those with ≥65% equity allocation).
• Rate: It’s a tiny 0.001% on the sale or redemption value.
• Who Pays?: It’s always borne by the seller or redeemer (you, if you’re selling!).

It’s a very small amount, but it’s good to know why it appears on your transaction statements.

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Dealing with Losses: Turning a Negative into a Positive (Tax-wise!)

Nobody likes to lose money, but if you do incur a capital loss on your mutual fund investments, the good news is you can use it to reduce your tax bill! This is called “set-off” and “carry forward.”

Set-off Rules

• Long-term losses: Can only be set off (used to reduce) against long-term capital gains. So, if you have an LTCG from one fund and an LTCL from another, you can use the loss to lower the taxable gain.
• Short-term losses: These are more flexible! They can be set off against both short-term capital gains and long-term capital gains. This means a short-term loss can reduce gains from either type of investment.
• Important Restriction: You cannot set off capital losses against other types of income, like your salary income or income from house property. They can only be used against capital gains.

Carry Forward Provisions

What if you have more losses than gains in a particular year? Don’t worry, you don’t lose them!

• Period: Unabsorbed capital losses (losses you couldn’t set off in the current year) can be carried forward for up to 8 consecutive assessment years. This means you can use them to offset future capital gains in the next 8 years.
• Condition: To be able to carry forward your losses, it’s absolutely crucial that you file your ITR within the specified due date for that financial year. If you miss the deadline, you might lose the ability to carry forward those losses.

So, even if your investments aren’t performing as expected, understanding these rules can help you manage your tax liability.

Also Read :–https://ipofront.in/securing-retirement-with-mutual-funds/

Which ITR Form Should You Use for Mutual Funds?

Choosing the right ITR form is essential for smooth filing. Here’s a simplified breakdown:

• ITR-1 (Sahaj): This is the simplest form. You can use it if:
  • Your total income is up to ₹50 lakh.
  • You have LTCG from equity mutual funds, but it does not exceed the ₹1.25 lakh exemption limit (meaning you don’t have taxable LTCG from mutual funds).
  • You don’t have any capital losses to carry forward or set off.
• ITR-2: You’ll need this form if:
  • You have taxable capital gains from mutual funds (i.e., your LTCG from equity funds exceeds ₹1.25 lakh).
  • You have capital losses from mutual funds that you want to carry forward to future years.
  • Your total income is above ₹50 lakh.
• ITR-3: This form is for you if you have business or professional income in addition to your capital gains from mutual funds.

Always double-check the latest ITR form instructions on the Income Tax Department’s website, as criteria can sometimes change slightly.

Documents You’ll Definitely Need for ITR Filing

Gathering your documents beforehand makes ITR filing much less stressful. For mutual fund investors, keep these handy:

• Annual Consolidated Statement (CAS): Your mutual fund houses (or RTAs like CAMS/KFintech) provide this. It’s a treasure trove, detailing all your mutual fund transactions across all folios.
• Capital Gains Statement: Many fund houses or platforms provide a dedicated statement showing your short-term and long-term capital gains and losses. This is super helpful.
• Form 26AS: This document (downloadable from the Income Tax portal) reflects any TDS (Tax Deducted at Source) that has been deducted on your income, including mutual fund dividends if applicable.
• Bank Statements: Useful for cross-verifying any dividend payments you received.
• PAN and Aadhaar: Always mandatory for filing your ITR!

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Understanding TDS on Mutual Fund Transactions

TDS (Tax Deducted at Source) means a portion of your income is already deducted as tax by the payer before it reaches you.

• Capital Gains: Generally, no TDS is applicable on capital gains from mutual fund redemptions. You calculate and pay the tax yourself when you file your ITR.
• Dividends: As mentioned earlier, if the total dividend income you receive from a specific mutual fund house in a financial year exceeds ₹5,000, they will deduct 10% TDS.
  • If your total income is below the taxable limit, you can submit Forms 15G (for non-senior citizens) or 15H (for senior citizens) to the mutual fund house to avoid TDS deduction on dividends.
• Debt Mutual Fund Redemptions: In specific cases, a 10% TDS might be applicable if the redemption amount from debt mutual funds exceeds ₹1 lakh in a financial year, especially for certain non-resident investor scenarios, though for most resident retail investors, capital gains TDS is not common. It’s always good to cross-verify.

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How to Report Mutual Fund Income in Your ITR

Once you have your documents and understand the taxes, reporting them correctly in your ITR is the final step.

• Capital Gains Reporting:
  • STCG: You’ll report short-term capital gains in the Schedule CG (Capital Gains) section of your ITR form.
  • LTCG: If your long-term capital gains from equity mutual funds exceed the ₹1.25 lakh exemption, you’ll need to report the taxable portion in Schedule 112A within the ITR form.
  • Asset Type: Make sure you select the correct asset category (e.g., “Equity shares or units of equity-oriented mutual funds”) when reporting.
• Dividend Income:
  • This is reported under the “Income from Other Sources” schedule in your ITR.
  • If TDS was deducted on your dividends (as shown in Form 26AS), you can claim credit for this TDS when you file your return, reducing your final tax payable.

Smart Tax Planning Tips for Mutual Fund Investors

Knowing the rules is half the battle; the other half is using them smartly!

• Tax Harvesting (for Equity Funds):
  • This is a clever strategy! You can sell equity mutual fund units annually to realize gains up to ₹1.25 lakh. Since this amount is tax-free, you pay no LTCG tax on it.
  • Immediately after selling, you can reinvest the proceeds back into the same fund (or a similar one) to maintain your exposure to the market. This resets your cost basis at a higher level, potentially reducing future tax liabilities, and you don’t lose market exposure.
• Loss Utilization:
  • Don’t ignore those losses! If your investments are down, it might be a good idea to book capital losses by selling the units. These losses can then be used to offset any capital gains you might have.
  • Remember to keep proper documentation if you plan to carry forward losses.
• Asset Allocation Considerations:
  • Given the increased tax rates on equity investments and the change in debt fund taxation, it’s a good time to revisit your asset allocation.
  • Think about longer holding periods for equity investments to continue benefiting from the lower LTCG rates (12.5% vs. 20% for STCG).
  • Always conduct a regular portfolio review considering not just returns, but also the tax implications of your investments. Diversification across asset classes remains key.

 

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Final Thoughts: Stay Informed, Stay Ahead!

The world of mutual fund taxation in India is always changing, and AY 2025-26 brings some notable shifts. By understanding these new rules, especially the increased tax rates on equity capital gains and the removal of indexation for most debt funds, you’re better equipped to file your ITR accurately and make smart investment decisions.

The extended due date of September 15, 2025, gives you a bit more time to get everything in order. But don’t wait until the last minute! Gathering your documents and understanding these provisions now will save you a lot of headache later.

Remember, while this guide provides comprehensive information, personal financial situations vary. It’s always a great idea to consult with a qualified tax professional for personalized advice tailored to your specific circumstances. Stay informed, and happy investing!

 

Useful Links :- 

Budget 2025: LTCG for Mutual Funds got revised in Budget 2024; how investors got impacted – BusinessToday
Budget 2025: AMFI releases 15-point proposal, includes restoring long-term indexation benefit for debt mutual funds – The Economic Times
Explained: How your mutual fund investments will be taxed in financial year 2025 – The Economic Times
How To File Income Tax Returns for Mutual Funds Investments?
Mutual Fund Taxation – How is Tax on Mutual Funds Applied to Your Returns?