I had purchased 1,000 units @ ₹10 per unit in UTI’s Master Gain Scheme in 1995. This was later renamed as UTI Equity Fund and still later as UTI Flexi Cap Fund. I redeemed the proceeds of the Scheme in August 2023 and received an amount of ₹1.65 lakhon redemption.

I had purchased 10,000 units @ ₹10 per unit in UTI’s Infrastructure Scheme in 2009. Since the face value of the units in the Scheme went below par, I switched over to UTI’s Dividend Yield Fund. I redeemed the proceeds of this Scheme in August 2023. I received an amount of ₹1.27 lakh as redemption amount.

I received approximately ₹2.92 lakhon account of redemption of the above two investments. Should I pay income tax on this redemption amount? The schemes have been classified as long-term assets in my Annual Information Report for Financial Year 2023-24.

So far, I have been filing ITR-1. Am I required to file ITR-2 for assessment year 2024-25 because of the above two transactions, which have been classified as long-term assets?

Jayaprakash Rao

1. Taxation under the head Capital Gains:

When investments are sold during a financial year (FY), they are subject to taxation as either long-term or short term capital gains according to the prescribed tax rates.

In the provided scenario, two different mutual funds were sold during the FY with holding periods of more than 12 months:

a. UTI’s Master Gain Scheme – Later renamed UTI Equity Fund and UTI Flexi Cap Fund

b. UTI’s Infrastructure Scheme – Later switched to UTI’s Dividend Yield Fund

If equity-oriented mutual fund units are held for more than 12 months, the resulting gains are classified as Long Term Capital Gains (LTCG) and taxed at 10 per cent if the LTCG exceeds ₹1 lakh in a financial year.

The calculation of Capital Gain/Loss is determined by reducing the Revised Cost of Acquisition as of January 31, 2018, from the Sale Price.

According to section 112A of the Income tax Act, 1961, the grandfathering rule applies to the above-mentioned securities since they were purchased before January 31, 2018.

The concept of grandfathering in the case of LTCG on the sale of equity investments operates as follows:

The Cost of Acquisition (COA) of such investments is determined as the higher of:

(i) The actual COA of such investments, and

(ii) The lower of:

• Fair Market Value (‘FMV’) of the mutual fund, i.e., the highest price quoted on BSE/NSE as on January 31, 2018, and

• Sale Value of the mutual fund.

Additionally, switching between mutual fund schemes constitutes a taxable event (gain or loss), subject to taxation as either long-term or short-term, depending on the period of holding as of the date of switch between the two schemes. Renaming the schemes/funds may not trigger a taxable event as there is no transfer of investments taking place.

2. Taxation under the head income from other sources:

Dividends distributed by any mutual fund scheme are included in the taxable income and taxed at the applicable income tax slab rates, regardless of whether the amount is deposited into a bank account or reinvested in mutual funds as directed by the investor at the time of investment.

3. Filing of Tax Return:

Taxpayers are required to report sale of mutual funds under ITR2 and ITR1 would not be applicable for FY 2023-24.