ITR-2 Filing for Debt Mutual Funds: Tax Rules You Must Know
From FY 2023–24, taxation of debt mutual funds has changed significantly. If you’ve sold any non-equity mutual fund units, including debt, international, gold, or even conservative hybrid funds, this blog will help you file ITR-2 accurately and avoid notices.
Let’s break it down using real examples and CBDT clarifications.
Who Should File ITR-2 for Debt Mutual Funds?
You must file ITR-2 if:
- You are an individual/HUF not having business income, and
- You have capital gains or losses, including from sale of mutual funds (debt or others),
- You are not eligible for ITR-1 or ITR-4.
This includes salaried individuals, pensioners, freelancers, or investors who sold debt mutual funds during the financial year.
New Tax Rules for Debt Mutual Funds (Post 1 April 2023)
As per Finance Act 2023, the indexation benefit and LTCG status no longer apply to mutual fund units that:
- Have <35% equity allocation, and
- Are purchased on or after 1 April 2023
Such funds are now taxed entirely as Short-Term Capital Gains (STCG), even if held for more than 36 months.
Key Section Amended:
➡️ Section 50AA was introduced to bring uniformity in taxing such funds.
➡️ No more 20% with indexation for these units. They are now taxed as per your slab rate.
What About Units Bought Before 1 April 2023?
Here’s where it gets tricky. You need to split the capital gains into two portions:
| Units Purchased | Held for ≤ 3 Years | Held for > 3 Years |
|---|---|---|
| Before 01.04.2023 | STCG @ slab rate | LTCG @ 20% with indexation |
| On/After 01.04.2023 | STCG @ slab rate | STCG @ slab rate |
So, redemption date + holding period + purchase date all matter.
How to Report in ITR-2 (Schedule CG)
For Units Bought On or After 01.04.2023
- Schedule CG → Short Term Capital Gains → From Assets Other Than Shares
- Mention the full value of consideration, cost of acquisition, and compute the gain.
- No indexation allowed.
For Units Bought Before 01.04.2023
- If held ≤36 months: Same as above, under STCG.
- If held >36 months:
- Schedule CG → Long Term Capital Gains → From Assets Other Than Shares
- Use indexed cost and apply 20% tax.
💡 Expert Tip:
Maintain folio-wise capital gain statements from AMCs or CAMS/KFintech. These are accepted by tax authorities and make filing easier.
Capital Losses on Debt Mutual Funds?
You can set off:
- STCL against any capital gain (STCG or LTCG)
- LTCL only against LTCG
Unused losses? Carry them forward for 8 years under Schedule CFL of ITR-2.
Mistakes to Avoid While Filing ITR-2
- Don’t claim indexation on post-April 2023 units
- Don’t report such income under “Income from Other Sources”
- Cross-verify amounts with AIS/TIS and AMC statements
- Don’t forget ISIN-wise reporting if capital gains exceed ₹50 lakh
Legal References & Clarifications
- Section 50AA of the Income-tax Act, 1961
- CBDT Circular No. 5/2023 on debt fund taxation
- Finance Act, 2023 – Clause 31
- Mutual fund classification under SEBI Mutual Fund Regulations, 1996
Checklist Before You File ITR-2 for Debt Mutual Funds
- Segregate pre-April 2023 and post-April 2023 units
- Check holding period – short-term or long-term
- Download AMC-wise capital gain statements
- Fill Schedule CG properly – STCG/LTCG as applicable
- Reconcile with AIS and 26AS
FAQs
Q1. Do I need to file ITR-2 if I only earned interest from debt mutual funds?
No. You file ITR-2 only if you sold the units and earned capital gains. Interest from fund-of-fund or liquid schemes is not separate income.
Q2. Are international mutual funds also taxed as per Section 50AA?
Yes. If equity component is below 35%, these too are taxed like debt funds.
Q3. Can I still claim indexation if I held for 3 years?
Only if you bought the units before 1 April 2023 and held for more than 36 months.
Summary
ITR-2 filing for debt mutual funds? New rules under Section 50AA mean no indexation for units bought after April 1, 2023. All gains are now taxed as STCG. Learn how to report in Schedule CG and avoid common filing mistakes.
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