Tax filing for mutual fund investors can be made easier with proper planning and organization. Before looking into tax filing details, let’s briefly explain systematic investing options and guidelines:
- Systematic Investment Plan (SIP):
A Systematic Investment Plan (SIP) is a method of investing in mutual funds, where an investor contributes a fixed amount regularly (monthly, quarterly, etc.) rather than investing a lump sum amount at once. SIPs offer several benefits, including rupee cost averaging, disciplined investing, and the potential for higher returns over the long term.
- Systematic Withdrawal Plan (SWP):
A Systematic Withdrawal Plan (SWP) is the reverse of SIP. It allows investors to withdraw a fixed amount regularly from their mutual fund investments. SWPs are useful for generating a steady income stream during retirement or other specific financial goals.
Tax Guidelines for Mutual Fund/ equity share Investors:
After investing in Mutual funds for more than 3 to 4 years, the portfolio tends to yield profits assuming CAGR of 12%. This is the time when the investor needs to file for capital gains.
- Capital Gains Tax: Mutual fund investors are subject to capital gains tax when they redeem or sell their mutual fund units. Capital gains can be classified into two categories: short-term capital gains (STCG) and long-term capital gains (LTCG).
– STCG: If the holding period of the mutual fund unit is less than 3 years, the gains are considered short-term and are taxed at the individual’s applicable income tax slab rate.
– LTCG: If the holding period is 3 years or more, the gains are considered long-term. For equity mutual funds, LTCG tax is applicable if the gains exceed Rs. 1 lakh in a financial year, and it is taxed at 10% without indexation.
- Dividend Distribution Tax (DDT): Until March 31, 2020, mutual funds were subject to DDT, which was paid by the fund house on dividend payouts. However, after the removal of DDT, dividends are now taxable in the hands of investors at their applicable income tax slab rate.
- Tax-saving Funds: Investments made in tax-saving funds (ELSS – Equity Linked Savings Schemes) are eligible for a deduction under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per financial year.
Tax Filing Tips for Mutual Fund/ share Investors:
- Maintain Proper Records: Keep a detailed record of all your mutual fund transactions, including purchase and redemption dates, investment amounts, and any associated expenses. This information will be crucial while calculating capital gains.
- Differentiate Between SIPs and Lump Sum Investments: Understand the tax implications of both SIPs and lump sum investments. SIPs may have varying capital gains tax implications as units are redeemed at different dates and prices.
- Use Tax-Efficient Strategies: Opt for tax-efficient funds, like index funds or ETFs, which generally have lower turnover and result in lower capital gains.
- Monitor Holding Periods: Be mindful of the holding periods for your mutual fund investments. If you are nearing the 3-year mark, consider holding on to the units for a bit longer to qualify for long-term capital gains tax rates.
- File Tax Returns on Time: Don’t wait until the last minute to file your tax returns. Filing early will give you ample time to organize documents and ensure accurate reporting.
- Seek Professional Help: If your tax situation is complex or if you are unsure about certain tax aspects, consider seeking help from a qualified tax consultant or financial advisor.
Always remember that tax laws and rules may change over time, so it’s essential to stay updated with the latest regulations that may affect your mutual fund investments and tax liabilities.
Income Tax filing in India
In India, there are several types of Income Tax Return (ITR) forms, and the selection of the appropriate form depends on the nature of income and the category of the taxpayer. Each ITR form caters to different types of taxpayers and their sources of income. As of my last update in September 2021, here are some key ITR forms:
- ITR-1 (Sahaj): For individuals with income from salary, one house property, other sources (like interest income), and total income up to ₹50 lakh.
- ITR-2: For individuals and HUFs (Hindu Undivided Families) not eligible to file ITR-1 and having income from more than one house property, income from capital gains, or having foreign income/assets.
- ITR-3: For individuals or HUFs having income from business or profession.
- ITR-4 (Sugam): For presumptive income from business and profession, and individuals with income from salary, house property, and other sources.
- ITR-5: For firms, LLPs (Limited Liability Partnerships), Association of Persons (AOPs), Body of Individuals (BOIs), and Artificial Judicial Persons (AJP).
- ITR-6: For companies that are not claiming exemption under Section 11 (Income from property held for charitable/religious purposes).
- ITR-7: For persons, including companies, required to furnish a return under Sections 139(4A), 139(4B), 139(4C), 139(4D), or 139(4E).
In general, most of the people file ITR1 for salaried employees, For investors having only capital Gain in Mutual funds and equity shares can file ITR2, for investors who involve in Intra day trading and Future and options they need to file ITR3. we will look into some aspects of filing tax for ITR-3.
Guidelines to File ITR-3:
Generally ITR3 is used to file tax returns for business persons who do intra-day trading, Future and options as their profession. Sometime even salaried persons do FNO and intra-day as a investing and can file the ITR3. It is also used to book losses from the business which can be carry forwarded to next year to set off the profits. Let us see the general steps involved.
Step 1: Visit the Income Tax India e-Filing Portal (https://www.incometaxindiaefiling.gov.in/) and log in with your credentials. If you are a new user, register and create an account.
Step 2: Download the ITR-3 form applicable for the relevant assessment year (AY) and assessment year (AY) for which you need to file the return.
Step 3: Gather all the necessary documents, including Form 16, books of accounts, bank statements, and other supporting documents related to your business or profession.
Step 4: Fill in the ITR-3 form carefully and accurately. Provide details of your income, deductions, and tax payments.
Step 5: Compute your total income, tax liability, and the amount of tax payable or refundable.
Step 6: Verify the information entered in the ITR-3 form and recheck for any errors or omissions.
Step 7: Generate the XML file of your ITR-3 form and save it on your computer.
Step 8: Go back to the Income Tax India e-Filing Portal and click on “Upload Return” to upload the XML file.
Step 9: After uploading the XML file, you will be asked to verify your return using one of the available options (Aadhaar OTP, EVC, or Digital Signature Certificate).
Step 10: Once your ITR-3 is successfully verified, the process is complete. You will receive an acknowledgment (ITR-V) on your registered email.
Step 11: If you have not used a Digital Signature Certificate (DSC) for verification, you must e-verify your return within 120 days from the date of filing.
Remember, the above guidelines were used to file using excel method in last years. Now this option for ITR3 can be files online in income tax portal.
For Detailed filing instructions please Click Here
Tax laws and filing procedures may change over time, so it’s always best to refer to the latest guidelines and instructions issued by the Income Tax Department for accurate and updated information.