Albert Einstein said, “The hardest thing in the world to understand is the income tax.” Taxes can seem daunting, but the process has become easier since Einstein’s time. You can’t escape taxes, whether you are a salaried individual, a business owner, or someone who dabbles in stocks or mutual funds.
If you have made profits while trading on the stock market or through mutual funds, you earn returns through capital gains, interest, and dividends. All of these returns are taxed differently. Here is how you can file your ITR correctly.
What are the Different Returns on Investment
To know how to file your returns, you need to know the different kinds of income generated from your investment. Here is a quick list of some common investment returns:
Capital gains
You get taxed on the capital gains when you sell your mutual funds, stocks or other investments for a profit. The two kinds of capital gains are:
- Short-term capital gains (STCG)
- Long-term capital gains (LTCG)
When you sell your holdings for a profit within 12 months, you get taxed STCG. It is taxed at 15% at base + any cess or surcharge (if applicable)
When you sell your holdings after having them for over a year and make more than ₹1 lakh in profit, you get taxed 10% LTCG (no indexation)
Debt mutual funds are now taxed differently. Since FY 2023-24, all gains (regardless of holding term) are taxed according to the investor’s income tax slab.
Interest Income
Interest income is taxed according to your income tax slab, as it is charged for other income sources such as liquid funds, fixed maturity plans (FMP), and sweep-in accounts.
Dividends
When you get dividends from mutual funds or stocks, they are considered income from other sources and are subject to taxation per your slab rate. Previously, you were exempted from paying taxes on dividends; however, this has changed post-budget 2020.
How do you Calculate Your Capital Gains
When filing your ITR for capital gains, calculate and categorise your capital gains correctly. Make sure to:
- Ensure your exemption of ₹1 lakh is applied for LTCG
- Report your gains and losses correctly for the right financial year
- Make sure your losses offset your gains so you don’t get taxed wrongly.
Which ITR Form to Use
You cannot use your regular ITR form to calculate earnings on capital gains or dividends. You need to file under:
ITR 2
Filed if you get income from capital gains, property, and other sources, barring income from your business and salary. This is ideal if you don’t trade but just invest.
ITR 3
Filed if your income is from stock trading instruments such as options, intraday trading, or futures. This income is assumed to be business income and is ideal for all kinds of trading incomes.
ITR 4 (Sugam)
Filed if you opt for presumptive taxation and your earnings come from business (in this case, trading instruments) or profession.
What Documents Do You Need
Now that you know which ITR to file under, you need to collect the following documents to start filing:
- Capital Gains Statement: Ideally, your mutual fund platform should provide this statement. You can also ask your broker for it.
- Demat Account Summary: Your broker or mutual fund platform should provide you with this.
- Bank statement: Your bank statement will have all necessary credit and debit statements.
- Form 16A: For any income (apart from your salary), such as income from other sources (trading, stocks, and mutual funds)
- Form 26AS: Needed to showcase any mutual fund transactions, TDS deductions, or dividends gained. You can also get this information from your Annual Information Statement (AIS) on the Income Tax Portal.
How to Report Dividend Income
Dividends received in the financial year must be reported under “Income from Other Sources.” You can verify the details through your Annual Information Statement, or your broker can provide that statement. Note the TDS deduction by your fund house on any dividend. This will ensure you receive credit when computing tax payable or refund due.
How to File ITR for Active Traders
Income for active traders (Futures, Options, or stocks) is considered business income. There is no capital gains tax levied on it. You need to file it under ITR-3. For that, you will need:
- A profit/loss statement, which you can get from your broker or trading platform
- Audit your account as per requirements under Section 44AB
- Maintain clear books of accounts to simplify your process.
Should You Pay Advance Tax
If your overall post-TDS tax burden is more than ₹10,000 a year, you must pay advance tax in four payments. Missing these could lead to interest under Sections 234B and 234C. You should budget your tax payments accordingly if you have significant gains or income from dividends.
How to Submit Your ITR
Once all the above steps are completed, it is time to file your ITR.
- Fill in your details on the relevant form, cross-check everything
- Don’t miss any exemptions, income sources, and deductions.
- E-Verify your submission within 30 days. You can do that using net banking, Aadhar OTP, EVC through a pre-validated demat or bank account, EVC through an ATM, or a Digital Signature Certificate (DSC)
PS: Not E-Verifying your ITR will deem your submission invalid. In that case, you will have to re-file.
Once your filing is done, check your status on the Income tax portal. If you see any notice regarding any clarification related to your submission, be prompt to update the information.
As a stock and mutual fund investor, you may find ITR filing complicated, but understanding your income categories and utilising the correct tools makes it easier. It also allows loss set-offs, rebates, and tax compliance.
Tax filing is essential to financial discipline, whether you’re an occasional investor or a committed trader. Before the deadline, plan and consult a tax advisor to file your ITR appropriately.