Reporting capital gains on equity and debt MFs? Here's a step-by-step guide

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

Reporting capital gains from shares, mutual funds (MFs) and other investments in the income tax return (ITR) has become more detailed after a series of tax changes introduced over the past two years. While most of the changes to capital gains taxation were implemented in FY24-25 or AY25-26, taxpayers filing returns this year for AY26-27 still need to navigate a detailed reporting framework, particularly for equity transactions.

Take debt investments, for instance. Until 31 March 2023, units of debt MFs sold after three years were treated as long-term and taxed at 20%. However, 1 April 2023 onwards, all debt MFs are treated as short-term irrespective of holding period and taxed at slab rates. So, taxpayers must carefully report gains from debt funds depending on whether the units were purchased before or after 1 April 2023.

One change for listed equity, however, makes reporting simpler this year. Last year, taxpayers had to separately report equity long-term capital gains (LTCG) depending on whether the sale took place before or after 23 July 2024 because the tax rules changed midway through the financial year. That bifurcation no longer applies while filing returns for FY2025-26. The reporting requirement has reverted to the usual distinction between shares acquired before and after 31 January 2018, which is relevant for the grandfathering provisions.

Even so, capital gains continue to require more manual work than most other income heads. Unlike salary, interest income or tax deducted at source (TDS), capital gains are not pre-filled in the ITR forms. While the Annual Information Statement (AIS) captures details of many securities transactions, taxpayers are responsible for computing and reporting the gains correctly.

Since capital gains are not auto-populated, taxpayers should first gather all documents required to report the gains accurately. For listed shares and mutual funds, the broker's or registrar's capital gains statement should form the basis of reporting, as it captures the purchase cost, sale consideration and holding period for each transaction.For listed shares acquired before 31 January 2018, you also need the fair market value (FMV) as on that date, wherever applicable, under the grandfathering provisions. Gautam Nayak, partner at CNK & Associates LLP, said taxpayers claiming this benefit should report the ISIN (International Securities Identification Number) of the security in the tax return. “It can be found in demat statement or in a consolidated account statement (CAS) from RTAs listing the ISIN for every fund scheme,” he added.

Any expenses incurred toward acquiring or selling the asset, such as brokerage and stamp duty, can be deducted from the cost of acquisition. These can be sourced from your broker's P&L statement, and the sale deed in the case of property. Lastly, keep investment proofs if capital gains are being claimed as exempt under sections 54, 54EC or 54F.

The next step is determining whether the gain is short-term or long-term, since this determines the applicable tax rate and the schedule under which the gain is reported.

For listed equity shares and equity-oriented MFs, investments held for more than 12 months qualify as long-term and are taxed at 12.5% after the annual exemption of ₹1.25 lakh, while short-term capital gains (STCG) are taxed at 20%.Classification for debt funds has become even more crucial after the tax overhaul that took effect from 1 April 2023. STCG now arises under two conditions. First, all units bought on or after 1 April 2023 qualify as short-term, regardless of holding period. Second, units bought before 1 April 2023 but redeemed within 36 months also count as short-term. FY 2025-26 is the last year in which units bought in FY 2022-23 and sold within the three-year window can still be declared short-term.LTCG applies only to units bought before 1 April 2023 and sold after be...