ITR Filing 2025: How Are Debt Mutual Funds Taxed, How To Report Them In Your Income Tax Return? | Tax News
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If you have invested in debt mutual funds and are unsure about the tax implications or how to report them in your ITR, here’s everything you need to know.
Debt mutual funds invest your money primarily in fixed-income securities like government bonds (G-Secs), corporate bonds, treasury bills, certificates of deposit, and other money market instruments.
ITR Filing 2025: The income tax return (ITR) filing season for the financial year 2024-25 (assessment year 2025-26) is underway. The last date for filing ITR without audit requirements is September 15, 2025. If you have invested in debt mutual funds and are unsure about the tax implications or how to report them in your ITR, here’s everything you need to know.
What Are Debt Mutual Funds?
Debt mutual funds invest your money primarily in fixed-income securities like government bonds (G-Secs), corporate bonds, treasury bills, certificates of deposit, and other money market instruments. Their main goal is to generate steady income with relatively lower risk compared to equity funds. However, they are not risk-free and are subject to interest rate fluctuations and credit risk.
It is also important to note that international mutual funds like those investing mainly in, let’s say, US market or China market, are also treated like debt mutual funds for taxation purposes.
What Is The Tax Rate On Debt Mutual Funds for AY 2025-26 (FY 2024-25)?
Before April 1, 2023, debt mutual funds enjoyed a favourable tax regime. If you held them for over 3 years, gains were considered Long-Term Capital Gains (LTCG) and taxed at 20% with indexation (indexation adjusts your purchase price for inflation, lowering your taxable profit). Gains within 3 years were Short-Term Capital Gains (STCG) taxed as per your income slab.
From April 1, 2023, the government removed the special tax status for debt mutual funds. Here’s the current tax treatment for redemptions made in FY 2024-25 (AY 2025-26):
1. All Gains Taxed as Income : Regardless of how long you hold them (even for 10 years!), any profit you make on selling units of a debt mutual fund is added to your total income.
2. Taxed at Your Slab Rate: This combined income is then taxed according to your applicable income tax slab rate (5%, 20%, or 30%, plus cess).
3. No Indexation Benefit: The crucial benefit of indexation for long-term holdings is gone for investments made on or after April 1, 2023.
4. No Distinction Between STCG & LTCG: The old concepts of Short-Term (held less than 3 years) and Long-Term (held for 3 years or more) capital gains for tax purposes no longer exist for debt funds under the new regime.
How are Equity Mutual Funds Treated?
Equity-Oriented Funds (funds investing at least 65% in Indian equities) still have special tax rates. They are treated as equity investments.
- STCG (Held < 12 months): Gains taxed at 15% sold before July 23, 2024 and 20% if sold after July 23, 2024.
- LTCG (Held >= 12 months): Gains up to Rs 1.25 lakh during FY25 are tax-free. Gains exceeding Rs 1.25 lakh are taxed at 10% if sold before July 23, 2025 and 12.5% if sold after July 23, 2024.
What If You Bought Before April 2023 and Sold During FY 2024-25?
You get the benefit of the old tax rules, but only if you held the units for more than 3 years.
Holding Period More than 3 Years (Long-Term): Your gain is Long-Term Capital Gain (LTCG) and is taxed at 20% on the indexed gain.
For example: Bought in January 2020 for Rs 1,00,000. Sold in May 2024 (FY 2024-25) for Rs 1,50,000. Indexed Cost (approx) = Rs 1,00,000 (CII 2024-25 / CII 2019-20). If indexed cost is Rs 1,20,000, taxable gain = Rs 30,000. Tax = 20% of Rs 30,000 = Rs 6,000 + cess.
Holding Period Less than 3 Years (Short-Term): Your gain is Short-Term Capital Gain (STCG). Added to your total income and taxed as per your slab rate (5%/20%/30% + cess). No special rate.
What If You Bought After April 2023 and Sold in FY 2024-25?
The new rules apply strictly. Holding period does not matter. Your entire profit (sale price minus purchase price, minus any exit load) is added to your total income. It is taxed as per your applicable income tax slab rate (5%/20%/30% + cess). No indexation benefit is available.
For example, you bought in June 2023 for Rs 1,00,000. Sold in February 2025 for Rs 1,10,000. Profit = Rs 10,000. If your total income (including this Rs 10,000) falls in the 30% slab, tax on this gain = 30% of Rs 10,000 = Rs 3,000 + cess.
How to Show Debt Mutual Funds in ITR-2 and ITR-3?
Gains from debt mutual funds (whether under old or new rules) are always treated as “Capital Gains” for individual investors. They are not considered “Business Income” unless you are professionally trading mutual funds (which is rare for typical investors).
Reporting in ITR-2 and ITR-3:
1. Find Schedule CG (Capital Gains): Both ITR-2 and ITR-3 have a dedicated “Schedule CG” to report capital gains from assets like mutual funds, stocks, property.
2. Separate Reporting for Each Category: Within Schedule CG, you need to report gains based on the asset type and holding period:
- Listed Securities (Shares, Mutual Funds etc.): Report gains from debt mutual funds.
- Differentiate STCG and LTCG (Based on Purchase Date & Holding Period):
- Column 5a (STCG – Listed Securities): Report gains from debt funds sold within 3 years of purchase (if bought before April 2023) or gains from all debt funds bought after April 2023 (as they are effectively STCG under tax law now).
- Column 5b (LTCG – Listed Securities): Report gains only from debt funds bought before April 1, 2023, and held for more than 3 years (eligible for 20% with indexation).
It will require details like Name of the Mutual Fund Scheme, Date of Purchase, Date of Sale/Redemption, Sale Value (Redemption Amount), and Purchase Cost.
It is always advisable to check your tax calculations with your financial advisor.
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to personal finance, markets, economy and companies. Having over a decade of experience in financial journalism, Haris h…Read More
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to personal finance, markets, economy and companies. Having over a decade of experience in financial journalism, Haris h… Read More
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