ITR filing AY 2025-26: A complete guide on taxation of mutual fund gains and losses in FY 2024-25

Mutual Fund AUM has risen 2.8x in the last 5 years, according to AMFI, thanks to growing awareness about the product's simplicity. However simple the mutual funds are, their taxation haunts many. While equity-oriented funds are taxed at 12.5% on gains after 1 year of holding, debt-oriented funds are always charged as per your slab.

Classification of mutual funds by what they hold

As of March 31, 2025, there were 1,760 mutual fund schemes in India, according to the Association of Mutual Funds in India (AMFI). However, for taxation of mutual funds for AY 2025-26 (FY 2024-25), we will focus on classification here, as that is relevant from a taxation perspective.

For taxation of mutual funds, we can divide mutual funds into three categories:

• Equity-oriented mutual funds: Mutual funds that hold at least 65% of their proceeds in the equity shares of Indian-listed companies.

• Specified mutual funds: Mutual funds that invest 35% or less of their proceeds in India-listed companies.

• Other mutual funds: That invest 35.01% to 64.99% of their proceeds in Indian-listed companies.

Typically, specified mutual funds will include:

• Liquid Funds / Money Market Funds / Income Funds (Debt Funds) / Gilt Funds,
• Gold ETFs/Bond ETF/Liquid ETFs,
• Fund of Funds (Domestic)*,
• Fund of Funds Investing Overseas*,
• Infrastructure Debt Funds, etc.

*Apart from the ones defined as equity-oriented under Section 112A of the Income Tax Act, 1961.

While other mutual funds may include balanced hybrids that roughly maintain a 40–60% allocation to equity shares of Indian-listed companies.

Classification of mutual funds by how long Investors hold the units

Apart from what mutual funds hold, the taxation rate on mutual funds also depends on the holding period. The categorisation is as follows:

1. 15% if sold before July 23, 2024; otherwise, 20% as per Section 111A.

2. 10% if sold before July 23, 2024; otherwise, 12.5% above annual gains of ₹1.25 lakhs under Section 112A.

3. 20% after indexation if sold before July 23, 2024; otherwise, 12.5% as per Section 112.

FIFO method used by authorities and how it impacts capital gains

The FIFO (First In, First Out) method is a crucial concept in the realm of taxation, particularly when dealing with the redemption of mutual fund units. This method is employed by tax authorities to determine the cost of acquisition and the period of holding to calculate capital gains tax.

Under the FIFO (First In, First Out) method, mutual fund redemptions are matched against the oldest purchased units first. For example, if an investor bought 1,000 units on January 1, 2020, and 500 more on June 1, 2020, then 800 units sold on January 1, 2021, would be considered to be from the first 1,000 units bought on January 1, 2020, purchase transaction. This method ensures the oldest units are treated as sold first, which directly influences the tax calculation.

From a tax perspective, FIFO impacts both the cost of acquisition and the period of holding. Capital gains are computed using the purchase price of the earliest units, which affects the gain/loss amount.

Almost all brokers having a digital platform have this in-built feature where they allow users to understand how much of their gains are to be classified as either short-term or long-term from the sale of mutual funds.

Avoid scrutiny – Reconciliation with CAS and AIS

Investors should download their capital gains statements from fund houses, brokers, or RTAs like CAMS and KFintech to track their mutual fund transactions. These reports should be cross-verified with the Annual Information Statement (AIS) available on the Income Tax portal.

This reconciliation helps ensure that gains reported in ITR match the data available with the tax department, preventing mismatches or notices. It's especially important for accurately reporting short-term and long-term capital gains while filing returns.

Which is the correct ITR Form?

When filing income tax returns in India, selecting the right ITR form is key to ensuring compliance and maximising tax benefits. ITR-2 applies to individuals and HUFs with income from salary, house property, capital gains, or other sources, but not business income.

If you have capital gains but no business or professional income, ITR-2 is appropriate. On the other hand, ITR-3 is meant for individuals or HUFs with income from business or profession, along with any other income, including capital gains.

Why is it critical to file by the due date?

The filing deadline for FY25 (AY 2025-26) is July 31, 2025. Filing by this date is critical for carrying forward losses. Capital losses can be carried forward for up to eight assessment years, but only if the return is filed on time.

Under Section 80, losses not filed within the due date are not eligible for future set-off, making timely filing essential. Correct form selection and meeting deadlines allow investors and taxpayers to manage capital gains efficiently while preserving loss set-off rights for future tax planning.