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

Ans: Taxability will depend on type of MF i.e. equity/debt. For equity MF, no tax upto gain of Rs.1 lac.

ITR 2 is applicable in case person have income from capital gain.

Ans: No tax if the profit is less than 1L. The grandfathering effect will be as on 31st Jan 2018. The tax rate post the benefits is 10%. The ITR to be filed is ITR 2 assuming you are a salaried person.

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