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MF ITR Filing: Clarifying Doubts for a First-Time Investor

T S Khurana

T S Khurana   |461 Answers  |Ask -

Tax Expert - Answered on Nov 26, 2024

A certified management accountant since 1993, T S Khurana is a fellow member of The Institute of Cost Accountants of India. His areas of expertise are income tax, specifically litigation cases, and GST.

Since the last 21 years, he has also been providing expert advice on financial matters, including investments and diversification of funds, and wealth building in the long term to his clients.
He believes that investment in real estate is the safest way for better returns and wealth generation over a period of time.

A former chairman of the Chandigarh Chapter of Institute of Cost Accountants of India, T S Khurana has also served as member of its technical committee.... more
Basab Question by Basab on Aug 26, 2024Hindi
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Would you please clarify the following doubts in regards to MF related ITR filing? 1. While filling ITR2 for MF, is the fair market value of units as on 31.01.18 is required,if units are purchased only last year and intend to sell this year. 2. Where I would get FMV as on 31.01.18 for my older units.Is it the NAV on 31.01.18? 3. For units which were initiated/started after 31.01.18, and purchased two/ three years back, only sell price and acquisition cost are sufficient? 4. Are the FMV available in AIS in ITax portal? Thank you

Ans: 01. FMP is required only in cases, where Shares/MFs were purchased before 31.01.2018.
02. Shares/MFs purchased last year or after 31.01.2018 will not require any such details.
03. I feel, FMV is not available in AIS (IT Portal).
Most welcome for any further clarifications. Thanks.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8327 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 07, 2024

Money
Sir, 3 MF sales were made and the AIS statement shows Fair Market Value (FMV) along with Sale Consideration and Cost of Acquisition. In all the cases FMVs are higher than the sale prices. I have read the definition off FMV. But please tell what is the significance FMV in AIS. While the tax is based on buy and sell values, why is the FMV given there? what is its connection with tax payment and where from FMV figures are derived at all because for MFs, buy and sell is based on NAV of the day? Chandran KM
Ans: Dear Chandran KM,

Thank you for your detailed query about Fair Market Value (FMV) in the Annual Information Statement (AIS). Understanding FMV's significance and its connection to tax payment is crucial. Let’s delve into the various aspects and implications of FMV in your AIS, especially in relation to mutual fund (MF) transactions.

The Role of AIS in Tax Reporting

The Annual Information Statement (AIS) is a comprehensive document that consolidates all your financial transactions. It includes details like income, investments, and sale of assets. The AIS aims to provide taxpayers with a complete view of their financial activities, aiding in accurate tax filing.

What is Fair Market Value (FMV)?

Fair Market Value (FMV) is the estimated price at which an asset would trade between a willing buyer and seller. For mutual funds, FMV is often derived from the Net Asset Value (NAV) of the funds on a specific date, usually determined by market conditions and the performance of the underlying assets.

Significance of FMV in AIS

Historical Valuation Reference: FMV provides a benchmark for the value of mutual fund units at a particular point in time. This helps in assessing the performance and growth of your investments.

Capital Gains Calculation: While capital gains tax is calculated based on the actual buy and sell prices, FMV can play a crucial role in determining the nature and extent of gains or losses, especially in special scenarios like the grandfathering rule in long-term capital gains.

Regulatory Compliance: Including FMV in the AIS ensures compliance with tax regulations and helps the tax authorities verify the correctness of declared gains or losses.

Connection Between FMV and Tax Payment

Grandfathering Rule for Long-Term Capital Gains: The FMV is particularly significant in the context of the grandfathering clause introduced in the 2018 budget. For assets acquired before 31st January 2018, the FMV as of that date is considered for calculating long-term capital gains, ensuring gains before this date are exempt from the new tax regime.

Determining Capital Gains: Capital gains are calculated as the difference between the sale consideration and the cost of acquisition (or FMV, if applicable). While the primary basis is the buy and sell values, FMV helps in special cases to ensure accurate tax liability.

Why FMV is Higher than Sale Prices

FMV being higher than the sale price can occur due to several reasons:

Market Fluctuations: The value of mutual fund units can fluctuate based on market conditions. The FMV might reflect a higher value on a specific date compared to the actual sale price when the market conditions were different.

NAV Variations: FMV is typically based on the NAV at a particular point in time. If the market performance declines or if specific events impact the mutual fund’s underlying assets, the actual sale price could be lower than the FMV.

Derivation of FMV for Mutual Funds

FMV for mutual funds is generally derived from the NAV, which represents the per-unit market value of the fund’s assets minus liabilities. NAV is calculated at the end of each trading day based on the closing market prices of the underlying assets.

Steps to Calculate FMV for Mutual Funds

Determine NAV on the Relevant Date: Identify the NAV of the mutual fund on the specific date (e.g., 31st January 2018 for grandfathering purposes).

Adjust for Corporate Actions: Adjust NAV for any corporate actions like dividends, splits, or bonuses that might affect the unit value.

Unit Multiplication: Multiply the NAV by the number of units you hold to get the FMV of your total holdings.

Impact of FMV on Investment Strategy

Informed Decision Making: Understanding FMV helps you make informed decisions about selling or holding your mutual fund units based on their market value and potential tax implications.

Tax Planning: Knowledge of FMV aids in strategic tax planning, ensuring you optimize your tax liability while maximizing investment returns.

Practical Example

Let’s consider a practical example to illustrate the significance of FMV in AIS and its impact on capital gains calculation.

Purchase Details: You bought 1000 units of a mutual fund on 1st January 2017 at Rs 50 per unit.

FMV on 31st January 2018: The NAV on 31st January 2018 is Rs 80 per unit, making the FMV Rs 80,000 for 1000 units.

Sale Details: You sold the 1000 units on 1st January 2023 at Rs 90 per unit, resulting in a sale consideration of Rs 90,000.

Capital Gains Calculation

Cost of Acquisition: Rs 50,000 (1000 units x Rs 50 per unit).

FMV Consideration: Since FMV (Rs 80,000) is higher than the cost of acquisition, the cost for capital gains calculation is taken as FMV.

Capital Gains: Sale Consideration (Rs 90,000) - FMV (Rs 80,000) = Rs 10,000.

Assessing the Need for a Certified Financial Planner (CFP)

A Certified Financial Planner (CFP) can help you navigate the complexities of tax laws and investment strategies. They can provide personalized advice on how to structure your investments and withdrawals to minimize tax liability and maximize returns.

Ensuring Compliance and Accuracy

Regular Reviews: Regularly review your AIS to ensure all entries are accurate and reflect your financial transactions correctly.

Consultation: Consult with a CFP or tax advisor to address any discrepancies or confusion regarding FMV and its implications.

Final Insights

Understanding the significance of FMV in your AIS is crucial for accurate tax reporting and strategic financial planning. While tax calculations are based on actual buy and sell values, FMV plays a vital role in specific scenarios like the grandfathering rule for long-term capital gains. It provides a benchmark for historical valuation and helps in assessing the performance of your investments. Regularly review your financial statements and consult with a Certified Financial Planner (CFP) to ensure compliance and optimize your investment strategy. With informed decisions and strategic planning, you can effectively manage your investments and tax liabilities.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Latest Questions
Ramalingam

Ramalingam Kalirajan  |8327 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 09, 2025

Asked by Anonymous - May 09, 2025
Money
Dear Sir, I am 55 and I am a stage 4 cancer patient for the past 5 years. Presently working with a salary of Rs.30 LPA. I have Rs.75 L in SB account. Rs.25 L in shares out of which Rs.12 L is loss. Rs.12 L in mutual funds. Rs.3 L in EPF. No commitments or liabilities. I need to know how I can get Rs. 70 K per month in case I lose my job. Kindly advise.
Ans: I truly appreciate your courage and clarity even in the face of health challenges. With your current financial resources and the need to secure a monthly income of Rs. 70,000, a detailed and careful plan is very much possible.

Let me give you a full 360-degree solution below, step-by-step.

Understanding Your Present Financial Picture
You are 55 years old and have been living with stage 4 cancer for 5 years.

You are still employed and drawing a salary of Rs. 30 lakhs per year.

You have Rs. 75 lakhs in your savings bank account.

You hold Rs. 25 lakhs in shares, with Rs. 12 lakhs in losses.

You have Rs. 12 lakhs in mutual funds.

Rs. 3 lakhs is in your EPF account.

You have no loans or financial commitments.

Your main concern is to receive Rs. 70,000 every month if the job stops.

You are not looking to take risks.

You want regular, reliable income without physical involvement.

Step 1: Emergency Medical and Health Fund
Health comes first. Keep money aside just for medical needs.

This fund should cover two years of your full household and medical costs.

Keep Rs. 15 to 20 lakhs aside for this purpose.

This money should be in ultra-safe places.

Prefer a savings bank account and liquid mutual funds.

This should remain untouched unless truly needed.

This emergency buffer gives peace and avoids panic in tough times.

Step 2: Generate Rs. 70,000 Monthly Income
Rs. 70,000 monthly means Rs. 8.4 lakhs needed per year.

Aim for post-tax cash flow from your investments.

Break your funds into income generation buckets.

Use your Rs. 75 lakhs from savings bank as the core capital.

Avoid keeping the full amount idle in SB account.

Allocate funds into low-risk, stable return instruments.

Prefer investment avenues offering quarterly or monthly payouts.

Choose options where you can withdraw in parts if needed.

Step 3: Structured Investment Allocation
Short-Term Bucket: 1 to 2 Years

Set aside Rs. 18 to 20 lakhs for short-term needs.

Put this money into highly liquid options.

Use only those that protect capital and give fixed income.

These funds will generate stable income for the next two years.

Prefer options offering monthly or quarterly payouts.

This will help replace your salary if job stops.

You don’t need to sell any shares or mutual funds right away.

You get time to think clearly, plan calmly.

Medium-Term Bucket: 3 to 5 Years

Keep around Rs. 25 to 30 lakhs here.

Invest in actively managed hybrid mutual funds.

Choose regular plans through a mutual fund distributor with CFP credentials.

Do not go for direct funds.

Direct plans do not come with personalised guidance.

There is no one to help you rebalance, switch or review.

Regular plans through a Certified Financial Planner offer ongoing support.

With hybrid funds, risk is moderate and returns are better than FDs.

Use SWP (Systematic Withdrawal Plan) to get monthly income.

You can set up SWP of Rs. 40,000 to 50,000 from this bucket.

These funds will last for years while also growing gradually.

Long-Term Bucket: 5+ Years

Keep Rs. 10 to 15 lakhs for the long-term.

This is not for current income, but for inflation beating growth.

Invest in actively managed large cap or balanced advantage funds.

Again, use regular plans with Certified Financial Planner.

These funds will build wealth for later stages.

You can shift gains to the medium bucket after 5 years.

Step 4: Shareholding Review and Action Plan
You have Rs. 25 lakhs in shares.

Out of this, Rs. 12 lakhs are in losses.

Do not sell them in a hurry.

Some may recover if you wait patiently.

First, make a list of all companies and their quality.

Exit poor-quality stocks even at a loss.

Retain good quality stocks with strong future.

If the whole portfolio is confusing, take help from a Certified Financial Planner.

You can harvest the loss now to set off gains later.

Book losses smartly to reduce future capital gains tax.

After cleaning up, move the proceeds to your medium bucket.

Step 5: Mutual Fund Review
You hold Rs. 12 lakhs in mutual funds.

Find out the type of each fund.

If these are equity funds, hold them long-term.

If returns are low or risk is high, shift to hybrid funds.

Avoid investing in index funds.

Index funds cannot protect capital in falling markets.

They simply copy the market blindly.

Actively managed funds are safer.

Professional fund managers take timely actions.

They reduce your risk and improve consistency.

Step 6: EPF Strategy
You have Rs. 3 lakhs in EPF.

EPF earns stable tax-free interest.

Do not withdraw unless it’s urgent.

Keep it as part of your long-term reserve.

Step 7: Monthly Income Setup
Use short-term and medium-term buckets to get income.

Start SWP from mutual funds for Rs. 40,000 monthly.

Use fixed income tools for Rs. 30,000 more.

Review this every year with a Certified Financial Planner.

Adjust amounts if needed based on inflation.

Step 8: Tax Planning and Awareness
Income from mutual funds is taxable.

Long-term capital gains above Rs. 1.25 lakhs taxed at 12.5%.

Short-term gains taxed at 20%.

Debt fund gains taxed as per your slab.

Plan redemptions to avoid tax shocks.

Harvest profits in a planned manner.

Step 9: Avoid These Common Mistakes
Do not invest in real estate.

It is illiquid and needs physical handling.

Do not buy annuities.

They give poor returns and lock your money.

Do not fall for insurance + investment combos.

If you already hold such policies, review them.

Consider surrender if return is poor.

Reinvest the proceeds into mutual funds.

Step 10: Use a Certified Financial Planner
A Certified Financial Planner gives structured and unbiased advice.

They help you with fund selection, SWP setup, rebalancing.

They guide you with tax-saving and risk control.

Their ongoing service is crucial at your life stage.

Choose someone with experience and clear credentials.

Finally
You are in a better financial position than many.

You have no loans, no dependents, and have built good savings.

With a calm and simple plan, you can replace your income safely.

You do not need to take risky steps now.

You have already shown strength by managing your life and job for 5 years.

Now your money should serve you with peace and stability.

Break your capital into buckets.

Get monthly income through safe withdrawals.

Review regularly with a Certified Financial Planner.

Avoid unnecessary complexity or noise.

You deserve a peaceful financial life.

Your health is precious. Let money be your quiet support.

Invest safe. Withdraw smart. Sleep well.

You are already doing well. Just add clarity and structure.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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