Income tax: How gains from mutual fund investments are taxed

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I had an investment in various mutual funds schemes both equity and debt through SIP’s for 3-4 years. I sold them all off 2 years back. The capital gain as per my accountant were indexed. I have come to know that long term capital gains on equity are exempt up to one lakh every year. I have not availed of the above exemption and I am sincerely requesting your help in getting the details (Income tax section and act) to avail of this deduction.

For the purpose of taxation of capital gains, mutual fund schemes are divided into two categories. Equity-oriented schemes is one category and rest of the schemes constitute the second category. For equity-oriented schemes, your investment becomes long-term if you redeem them after one year whereas investments in the rest of the schemes become long-term after three years.

The long term capital gains on equity schemes are taxed at a flat rate of 10%, without the benefit of indexation, after initial exemption of one lakh rupees which includes long term capital gains on directed shares listed in in India under Section 112A whereas the short term capital gain gets taxed at flat rate of 15% under Section 111A.

The long term capital gains on other schemes gets taxed at flat rate of 20% after indexation under Section 112 whereas the short-term capital gain on these schemes is treated like your regular income and is taxed at the slab rate applicable to you.

I think your accountant must have availed the benefit of initial exemption on long-term capital gains in respect of equity-oriented schemes as the ITR utility itself will reduce such taxable long term capital gains. Please note that no indexation is available in respect of long term capital gains on equity schemes and your accountant must have taken the benefit of indexation only for the debt schemes held for more than three years. Please verify the same by downloading the ITR form from the website of income tax department. Even presuming that your accountant has committed mistake, nothing can be done now as the time to file the revised ITR for assessment 2020-2021 is over.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.

 

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