ABC of reporting capital gains in tax returns

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Summary

Reporting the capital gains on mutual fund units or stocks can turn out to be a complex task for investors

The deadline for filing income tax return (ITR) for assessment year 2021-22 is nearly up. If you have sold your mutual fund (MF) units or stocks holdings in the financial year 2020-21 and are yet to file your ITR, you could end up in some trouble. This is because reporting the gains, which are essentially the profit part in the total sale value, from MFs or stocks capital is a complex task.

To begin with, investors who invest via systematic investment plans (SIPs) in MFs have the tedious task of sifting through the monthly or quarterly transaction data as per the frequency of the SIP opted.

Further, tax rules vary across debt-oriented and equity-oriented MFs and as per the holding period of the MF units or stocks.

LTCG (long-term capital gains) on equity funds is realized when they are sold after a holding period of at least 12 months. The LTCG tax rate on equity funds is 10%, whereas short-term capital gains (STCG) are taxed at a flat rate of 15% . LTCG up to ₹1 lakh in a financial year is exempt from tax.

For debt funds, if the MF holding is sold within three years of purchase, STCG is realized and taxed at slab rates. LTCG on debt funds is taxed at 20% after indexation, which allows taxpayers to adjust the purchase price of the asset as per inflation.

Capital gains are calculated by deducting the sale value of MF units with its purchase price, or known as cost of acquisition. Capital gains are reported in ITR-2 and ITR-3 by salaried individuals and those with a business income, respectively. Mint answers some of the most frequently asked questions around reporting capital gains on MFs.

I’ve sold more than one of my MF holdings. Should I report each MF transaction separately?

The I-T laws ask for detailed reporting of LTCG made on sale of more than one MF holding or shares. From assessment year 2019-20, the ITR forms were modified to include exhaustive reporting of LTCG made on sale of listed shares, equity MFs or equity units in a company where securities transaction tax (STT) is paid under Schedule 112A. This was the year when LTCG tax on equity mutual funds for gains above ₹1 lakh and grandfathering clause for the investments made in equity MFs on or before 31 January 2018 was introduced. Earlier, taxpayers were allowed to fill the consolidated capital gains amount under the capital gains head and not required to disclose break-up of each scrip.

While filing Schedule 112A was optional for assessment year 2019-20, it was made mandatory to disclose the scrip wise details of all the listed shares and MFs sold during a financial year assessment year 2020-21 onwards. In the case of STCG, you can just report the consolidated amount of short-term gains made and do not have to disclose details of each transaction.

I had invested through SIPs. Do I need to calculate the holding period for each SIP separately?

For investments made through the SIP route, the holding period of each SIP should be calculated separately to correctly determine the LTCG and STCG realized. For instance, if a taxpayer sells the entire holding of an equity fund where she has done 24 SIPs, the first 12 SIPs will qualify for LTCG and gains below ₹1 lakh will not attract any tax. However, the last 12 SIPs will realize STCG and be taxed at 15%. If you make LTCG over the ₹1 lakh threshold, they will be taxed and 10% and details of LTCG made on each of these 12 SIPs is to be disclosed under Schedule 112A.

Can I get a consolidated report for all the transactions?

Registrar and transfer agents (RTAs) such as CAMS (Computer Age Management Services) provide capital gains statements to investors. Mutual fund houses too give individual statements of gains made on their funds, but it is better to get a consolidated statement from an RTA.

These statements can easily be downloaded from the RTA’s website under the realised gains section. Capital gains statement is one of the essential documents that you must keep handy while filing your ITR, especially when you have purchased and sold multiple shares or MF units.

What will be the cost of acquisition for MF units bought before LTCG on equity MFs was introduced?

As per the grandfathering clause introduced in assessment year 2019-20, cost of acquisition of the stocks or MF units bought before 31 January 2018 will be higher among the actual purchase price and its fair market value (FMV) as of 31 January 2018. Further, if the sale price of the share sold is less than the FMV, then the former will be taken as the cost of acquisition. FMV of a MF is its NAV on 31 January 2018, while for a stock, it’s the stock’s highest trading price on 31 January 2018.

I have made LTCG below ₹1 lakh on selling MF units. Should I report it?

The I-T laws exempt LTCG below ₹1 lakh made on equity MFs from tax. However, it still needs to be reported in the ITR as declaring exempted income is a way to inform the I-T department that you have opted for tax exemption. This also means that even if you have incurred long-term capital gains (LTCG) on equity funds below the exemption limit of ₹1 lakh, you cannot opt for the simpler ITR-1 and instead opt for ITR-2 or ITR-3 to file your income tax returns. The ITR utility automatically deducts ₹1 lakh exemption amount when you report capital gains on equity.

Can I set off losses from the sale of shares?

Capital losses realized on the sale of shares or MFs can be set-off against capital gains from a capital asset only and no other source of income. Further, as per the I-T rules, long-term capital losses can only be adjusted against LTCG, though from any asset. For instance, you can set-off short-term losses from MFs against LTCG realised on residential property.

Short-term losses, however, can be set-off against both STCG and LTCG from any capital asset. Since capital losses are allowed to be set-off against capital gains from any capital asset, the ITR utility automatically calculates net gains and sets off the losses, if any, against capital gains realized on any other asset after you key in the purchase value, FMV and sale value of all assets. If you haven’t reported any other asset, you can carry forward the unadjusted losses to up to eight years and set them off against LTCG from stocks and other assets.

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