Which ITR to file for income from mutual funds? Here's what taxpayers must know for FY 2024-25
With the income tax return (ITR) deadline for Assessment Year 2025–26 approaching, individuals with investments in mutual funds must be cautious while selecting the correct ITR form. The type of form depends on the nature and amount of income, and a mismatch may lead to scrutiny.
Type of Mutual Fund Income Affects ITR Form
Income from mutual funds can arise from:
- Capital gains: On redemption or sale of mutual fund units.
- Dividends: Credited to the investor’s bank account.
Both are treated differently under the Income Tax Act and must be disclosed accordingly.
ITR-1 (Sahaj): For Basic Salaried Taxpayers Without Capital Gains
ITR-1 is for individuals having:
- Salary or pension income,
- One house property,
- Income from other sources (excluding winnings from lottery or racehorses),
- And total income up to Rs 50 lakh.
However, ITR-1 cannot be used if there is capital gain income, such as from the sale of mutual fund units. Even small capital gains disqualify the use of this form.
ITR-2: For Capital Gains From Mutual Funds
If you earned short-term or long-term capital gains from equity or debt mutual funds, you need to file ITR-2.
ITR-2 is applicable to:
- Individuals and HUFs not having income from business or profession.
- Those who have income from capital gains and more than one house property.
This is the most common form for salaried individuals who invest in mutual funds.
ITR-3: For Business Income + Capital Gains
If you are a mutual fund investor and also have income from business or profession, you should file ITR-3.
This form covers:
- Individuals/HUFs with both capital gains and business income.
- Freelancers or consultants with capital market investments.
Mutual fund capital gains, dividend income, and business income can all be declared here.
ITR-4 (Sugam): Presumptive Income Scheme — Not for Capital Gains
ITR-4 is for those opting for the presumptive taxation scheme under sections 44AD, 44ADA, or 44AE. However, it cannot be used if the individual has capital gains income or income from foreign assets.
Hence, mutual fund investors should avoid ITR-4 if they have sold fund units during the year.
Dividend Income from Mutual Funds
Dividends from mutual funds (after abolition of Dividend Distribution Tax from FY 2020-21) are taxable in the hands of the investor under “Income from Other Sources”. This income should be:
- Declared in ITR-2 or ITR-3, based on overall income profile.
- Cross-verified with Form 26AS or AIS (Annual Information Statement).
What Taxpayers Must Do Before Filing
- Check capital gains statement from AMC or consolidated account statement.
- Match data with Form 26AS and AIS.
- Use the correct ITR form based on income sources and amount.
- Declare dividends separately from capital gains.
- Ensure accuracy in ISIN-wise reporting for LTCG if applicable.
Final Word
Selecting the correct ITR form based on mutual fund transactions is essential to avoid scrutiny. For most salaried investors with capital gains, ITR-2 is the appropriate form. Those running a business or freelancing while also investing in mutual funds should use ITR-3. Filing the wrong form may result in return being treated as defective under Section 139(9).
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