When filing your Income Tax Return (ITR) for FY2024-25 (Assessment Year 2025-26), it's essential to understand how capital gains from the sale of mutual funds are taxed. Recent changes in tax regulations, particularly those effective from July 23, 2024, impact how these gains are calculated and reported. This article provides a comprehensive guide to help you navigate these tax implications.

Understanding Capital Gains

Capital gains arise from the profit you make when you sell an asset, such as mutual fund units. The profit is the difference between the selling price and the purchase price. Capital gains are categorized into two types:

• Short-Term Capital Gains (STCG): Profits from assets sold within a specified period.
• Long-Term Capital Gains (LTCG): Profits from assets sold after a specified period.

Holding Period and Tax Rates

The holding period determines whether your gains are classified as short-term or long-term. The recent Union Budget 2024 declared that the short term capital gains from specified financial assets will be taxed at 20 percent. The holding periods have been simplified to two categories:

• For listed securities: One year.
• For all other assets: Two years.

Here’s a breakdown of the tax rates for both equity-oriented and debt-oriented mutual funds:

Equity-Oriented Funds

• If sold within 12 months, STCG is taxed at 20%.
• If sold after 12 months, LTCG is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year. Gains up to ₹1.25 lakh are exempt from tax.

Debt-Oriented Funds

• For investments made on or after April 1, 2023, gains are treated as STCG, regardless of the holding period, and taxed according to your income tax slab.
• For investments made before April 1, 2023, and sold after July 23, 2024, LTCG is taxed at 12.5% without indexation if held for over 24 months.

Key Changes from FY 2024-25

Several significant changes have been introduced that impact capital gains taxation from FY 2024-25:

• Simplified Holding Periods: The holding period for listed securities is now one year, and for all other assets, it is two years.
• Rationalized Tax Rates: Tax rates for most assets have been unified.
• Indexation Benefit Removed: The indexation benefit, which adjusted the purchase price for inflation, has been removed. The LTCG tax rate has been reduced from 20% to 12.5%.

Reporting Mutual Fund Gains in ITR

To accurately report your mutual fund gains, follow these steps:

1. Choose the Correct ITR Form:

   • ITR-1 (Sahaj): Can be used if your LTCG from listed equity shares or equity mutual funds is up to ₹1.25 lakh and you have no carried forward losses.
   • ITR-2: For individuals with income from salary, multiple house properties, capital gains, and foreign assets. This form is commonly used if your income exceeds ₹50 lakh or if you have investments in stocks, mutual funds, or assets that result in capital gains.
   • ITR-3: Required if you have income from a business or profession.
   • Download Form 26AS and AIS: Obtain these forms from the Income Tax website to verify TDS and income credited.
   • Consolidate Capital Gain Statements: Prepare capital gain statements (STCG/LTCG) for debt and equity schemes.
   • Fill in the Capital Gains Schedule (Schedule CG): Provide complete details in the Capital Gains Schedule of the ITR form. This includes the type of asset transferred, dates of acquisition and sale, sale consideration, and indexed cost of acquisition.
   • Segregate Capital Gains: Report capital gains based on the transaction date—before and after July 23, 2024.
   • Add Deductions: Include deductions for advance tax paid or TDS deducted on dividends.
   • Verify and File: Ensure all details are accurate before submitting your ITR.

Exemptions and Deductions

The Income Tax Act offers certain exemptions and deductions to reduce the tax liability on long-term capital gains from mutual funds:

• Threshold Limit: For equity-oriented mutual funds, gains up to ₹1.25 lakh in a financial year are exempt from tax.
• Section 54EC: Capital gains of up to ₹50 lakhs from the sale of a long-term asset can be exempted if the proceeds are invested in specified bonds within 6 months.

Important Considerations

• New vs. Old Tax Regime: Capital gains from mutual funds are taxed under both the old and new tax regimes. The choice of regime does not impact the categorization of the MF or the computation of capital gains.
• Surcharge Rates: Surcharge rates vary based on the tax regime chosen. Under the old tax regime, the maximum surcharge is 37% (for income exceeding ₹5 crore), while under the new regime, it is restricted to 25% (for income exceeding ₹2 crore).
• Carry Forward Losses: Capital losses can be carried forward for eight assessment years and set off against future gains, provided the loss was reported in the ITR.
• Documentation: Maintain proper documentation, including purchase and sale details, for reporting and audit purposes.

By understanding these regulations and changes, you can accurately file your ITR and ensure compliance with the latest tax laws.