Which ITR Form to File for Mutual Fund Investments?

Introduction

Tax filing season often makes investors nervous, especially if they’ve been investing in mutual funds. One of the most common mistakes salaried individuals make is sticking with ITR-1 even when their mutual fund portfolio generates capital gains or dividends. The truth is, if you’re earning from mutual funds, you need to switch to ITR-2 (or ITR-3 if you also have business income). And yes, this switch is mandatory — not optional.

In this blog, we’ll break down how mutual fund earnings affect your ITR form selection and what details you must report to avoid tax hassles later.

Mutual Funds & ITR Filing: What You Need to Know

Dividend Income from Mutual Funds

Dividends earned on mutual funds are fully taxable as per your income tax slab rate. These need to be reported under the head “Income from Other Sources.”

• If your total dividend exceeds ₹5,000 in a year, TDS (Tax Deducted at Source) applies, and you must report it while filing.
• The good news? If you’ve taken a loan to invest, you can claim a deduction of up to 20% of the interest paid against dividend income.

Capital Gains from Mutual Funds

If you sell mutual fund units, the gains are classified into short-term or long-term:

• Short-Term Capital Gains (STCG): If units are sold within 12 months, gains are taxed at 15%.
• Long-Term Capital Gains (LTCG): If units are held for over 12 months, gains above ₹1 lakh in a financial year are taxed at 12.5% (as per the revised Budget 2024 rules, earlier it was 10%).
• All such details must be reported under Schedule 112A in the ITR form.

💡 Pro tip: If you booked a capital loss, don’t ignore it. Filing on time allows you to carry forward losses for up to 8 years and adjust them against future gains.

Why Choosing the Right ITR Form Matters

Filing with the wrong ITR form (say, sticking with ITR-1 when you actually need ITR-2) can make your return defective. This may lead to:

• Delays in processing refunds
• Notices from the Income Tax Department
• Loss of tax benefits due to improper reporting

Correct filing ensures compliance and helps you maximize deductions without trouble.

 

Final Word

Tax filing isn’t just about ticking boxes. It’s about using the right form, reporting income accurately, and ensuring you don’t lose out on deductions or carry-forward benefits.

At JM Financial Services, our experts guide you through tax-efficient investing so that filing your ITR becomes simple and stress-free.

FAQs on Mutual Funds & ITR Filing

Q1. Can I file ITR-1 if I only earned dividends from mutual funds?
👉 No. If you’ve earned dividends or capital gains from mutual funds, you need to file ITR-2.

Q2. Where should I report mutual fund dividends in ITR?
👉 Dividends must be reported under “Income from Other Sources.”

Q3. Do I need to pay tax if my capital gains are less than ₹1 lakh?
👉 No. Long-term capital gains up to ₹1 lakh in a financial year are exempt.

Q4. Can I carry forward losses from mutual funds?
👉 Yes. You can carry forward short-term and long-term capital losses for up to 8 years, provided you file your ITR on time.

Q5. Which ITR should I file if I have salary + business income + mutual fund gains?
👉 In that case, you must file ITR-3.