ITR Filing 2025: Complete Guide to Taxation of Debt Mutual Funds and Step-by-Step Reporting in Your ITR

The deadline for filing income tax returns has been extended for the assessment year 2025-26 (financial year 2024-25) and the season to file taxes is officially here.

However, the deadline has also been extended for filing non-audit ITRs till September 15, 2025.

In case you have redeemed your debt mutual funds during FY2025 and are confused about how much tax is applicable, and how to report them in your ITR, here is all you need to know:

Debt mutual funds invest your money primarily in fixed-income securities such as government bonds (G-Secs), corporate bonds, treasury bills, certificates of deposit, as well as other money market instruments.

They also aim to generate steady income with relatively lower risk as compared to equity funds. However, they are not entirely risk-free and are subject to interest rate fluctuations as well as credit risk.

Additionally, it is also important to note that international mutual funds such as the ones that are mainly investing in US markets or China markets are also treated like debt mutual funds for taxation purposes.

Debt mutual funds were enjoying a favourable tax regime before April 1, 2023 and if you held them for a period of more than 3 years, gains were considered long-term capital gains (LTCG) and were taxed at 20% with indexation (indexation adjusts your purchase price for inflation, lowering your taxable profit). Gains within 3 years are short-term capital gains (STCG) taxed as per your income slab.

Starting from April 1, 2023, the government removed the special tax status for debt mutual funds.

The current tax treatment for redemptions made in FY 2024-25 (AY 2025-26) is as follows:

1. All gains are taxed as income, regardless of how long you hold them (even if it is for 10 years). Any profit you make on selling units of a debt mutual fund is added to your total income.

2. This combined income is then taxed according to your applicable income tax slab rate (5%, 20%, or 30%, plus cess).

3. The crucial benefit of indexation for long-term holdings is also removed for investments made on or after April 1, 2023.

4. There is no distinction Between STCG and  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of Short-Term (held less than 3 years) and Long-Term (held for 3 years or more) capital gains for tax purposes are no longer applicable for debt funds under the new regime.

Here is a step-by-step guide to report debt mutual funds:

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 and 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).

This will require details like Name of the Mutual Fund Scheme, Date of Purchase, Date of Sale/Redemption, Sale Value (Redemption Amount), and Purchase Cost.

However, it is always advisable to check your tax calculations with your financial advisor.

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