ITR filing for salaried employees with mutual fund AY 2026-27
Salaried employees who redeemed or switched Mutual Funds cannot file the standard ITR-1 form. You must file ITR-2 for Assessment Year (AY) 2026-27 (Financial Year 2025-26) to report mutual fund capital gains.
Even if you only switched from one scheme to another (e.g., Growth to Income, or Regular to Direct) or initiated an STP (Systematic Transfer Plan), the Income Tax Department treats it as a redemption (sale), and it will appear in your auto-generated Annual Information Statement (AIS).
📊 1. Tax Treatment of Mutual Funds (AY 2026-27 Rates)
The tax rate depends on whether the mutual fund is classified as Equity-Oriented or Debt-Oriented.
Equity Mutual Funds (Exposure to domestic stocks > 65%)
- Short-Term Capital Gains (STCG): If held for 12 months or less. Taxed at a flat rate of 20%.
- Long-Term Capital Gains (LTCG): If held for more than 12 months. Taxed at 12.5%.
- Exemption: Combined LTCG from listed equity shares and equity mutual funds is exempt up to ₹1.25 Lakh per financial year. You only pay 12.5% on the amount exceeding ₹1.25 Lakh.
Debt Mutual Funds (And other non-equity funds)
- All Gains: For any debt fund investment made after April 1, 2023, both short-term and long-term gains are treated as short-term.
- Tax Rate: No LTCG benefit or indexation is allowed. The total profit is added to your salary income and taxed at your applicable slab rate.
🛠️ 2. Documents You Need Before Filing
- Form 16: From your employer for your salary breakdown.
- Consolidated Capital Gains Statement: Download this directly from CAMS/KFintech or your investment platforms (like Groww, Zerodha Coin, Kuvera). It lists the exact cost of acquisition, sale value, and holding period type.
- AIS / TIS (Annual Information Statement): Download this from the Income Tax Portal to match your records with what mutual fund houses have reported to the tax department.
📝 3. Step-by-Step Filing Process in ITR-2
Step A: Fill Salary Income
- Enter your basic salary, allowances, and perquisites in Schedule Salary using your Form 16.
Step B: Fill Mutual Fund Capital Gains
- Navigate to Schedule CG (Capital Gains).
- Check the boxes for:
- Section 111A: For Short-Term Equity Mutual Funds.
- Section 112A: For Long-Term Equity Mutual Funds.
- From others: For Debt Mutual Funds.
- For Equity Funds (LTCG): Go to Schedule 112A. You need to input details like the ISIN Code, Name of the Fund, Number of Units sold, Sale Price, and Cost of Acquisition. The system will automatically calculate the ₹1.25 Lakh exemption.
- For Debt Funds: Input the sale value and purchase cost under the normal short-term asset section. The profit will automatically route to your gross taxable income block.
Step C: Fill Dividend Distributions
- If you hold IDCW (Income Distribution cum Capital Withdrawal) options (formerly Dividend options), declare the received amounts in Schedule OS (Income from Other Sources). It is taxed at your regular tax slab.
Step D: Map Set-offs and Carry Forward Losses
- If you made a loss on your mutual funds, report it in Schedule CYLA. Short-term capital losses can offset both short-term and long-term gains. Long-term capital losses can only offset long-term gains.
- Reporting losses allows you to carry them forward for up to 8 years to lower your future tax bills.
⚠️ Common Pitfall to Avoid
Do not skip reporting switches: Moving money from a liquid fund to an equity fund inside the same mutual fund house is considered a sale of the liquid fund. Failing to declare this will trigger a tax mismatch notice because the transaction is flagged automatically in your AIS profile.