Income tax return: How to report capital gains correctly to avoid ITR filing mistakes

When filing income tax returns for the last financial year, the declaration of any capital gains income warrants careful scrutiny, given the several changes in tax rules in recent years. Mistakes or omissions in reporting capital gains get easily captured by the tax authorities, which now cross-check your return against broker statements, mutual fund reports, the Annual Information Statement (AIS), Form 26AS and other thirdparty data. Here is everything you need to know about declaring capital gains.

Which ITR form to use

First, make sure you file your income using the correct form. If you have long-term capital gains (LTCG) in excess of Rs.1.25 lakh, ITR-1 cannot be used. If your long-term equity capital gains for 2025-26 are below the Rs.1.25 lakh exemption threshold, with no loss to carry forward, you can use ITR-1. Individuals with salary or other income and capital gains in excess of Rs.1.25 lakh, but no business or professional income, must use ITR-2. Individuals with business or professional income alongside capital gains must file under ITR-3. Individuals with gains from futures and options (F&O) trading must report them under this form, as such income is treated as business income.

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File under the correct section

All disclosure of capital gains must be filed in Schedule CG. This schedule houses separate sections for different types of gains. For accurate tax liability computation, you must file under the relevant sections only. For example, if you enter LTCG from equity under Section 112 instead of 112A, you will miss the Rs.1.25 lakh exemption that applies to this gain under the latter.

Further, different assets have different holding periods and tax rates. While reporting capital gains, make sure you split them into short-term and long-term gains. Don’t club everything together. Alok Agrawal, Partner, Deloitte India, says, “Whether a gain is treated as short-term or long-term depends on how long you held the asset. A simple mistake in calculating the holding period can lead to the wrong tax being paid.”

For each instrument, disclose the acquisition and sale dates, cost of acquisition, and sale consideration. Older equity investments may require grandfathering of cost under applicable tax rules. For shares bought before 1 February 2018, your cost is the higher of the actual cost or the lower of the fair value on 31 January 2018 and the sale price. This provision protects older gains. Do not blindly report the gains mentioned in your broker’s statement, without checking whether grandfathering has been correctly applied.

Be mindful of new tax provisions

When the capital gains framework was overhauled in July 2024, taxpayers had to split and report their gains into two separate date buckets for gains before and after 23 July 2024. This split-year reporting of capital gains is now removed, points out Amit Maheshwari, Managing Partner, AKM Global. Now, a single, uniform rate applies to the whole financial year. A uniform LTCG tax rate of 12.5% now applies for any asset sales in the last year. For listed shares and equity mutual funds, gains on investments held for more than 12 months are taxed as LTCG. For property, physical gold and most other unlisted assets, gains generally qualify as long-term if the asset is held for more than 24 months.

Note that the indexation benefit on sale of properties acquired on or after 23 July 2024 was removed. These get taxed at a flat rate of 12.5% without indexation. However, for properties acquired before July 23, 2024, taxpayers can opt for the old tax rate of 20% with indexation if it results in a lower tax liability.

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Also note that from 1 April 2025, Gold ETFs, Silver ETFs, and Overseas Fund of Funds are no longer classified as Specified Mutual Funds. These are now subject to LTCG at 12.5% with a 12-month holding period threshold (24 months for overseas FoF), and not at slab rates for any holding period. Irrespective of the holding period, gains on debt funds acquired on or after 1 April 2023 are taxed at slab rates.

How capital gains are taxed now

*on gains exceeding Rs.1.25 lakh in a year. STCG is short term capital gains. LTCG is long term capital gains. #For purchase on or after 23 July 2024. For purchase before this date, taxpayers can opt for 20% tax rate with indexation or flat tax rate of 12.5%, whichever is lower.

Which form to choose for capital gains?
ITR-1
For long-term capital gains from equities up to Rs.1.25 lakh, besides other eligible income.
ITR-2
If capital gains exceeding Rs.1.25 lakh in a year (for shares, equity funds), or any capital gains (for property, gold, etc.) and no business income.
ITR-3
If you have business income, including trading income where applicable.

Documents you should reconcile before filing

• Before finalising Schedule
• CG,match the figures against:
• R Broker capital gains statement
• R Mutual fund capital gains statement(from the registrar or AMC)
• R AIS
• R Form 26AS
• R Property sale deed (if applicable)
• R Purchase documents
• R Previous year’s ITR (for broughtforward losses)

Claim exemptions correctly

Rules allow individuals to claim exemption from capital gains tax under specific conditions. Long-term gains from equity shares and equity mutual funds up to Rs.1.25 lakh are tax-exempt. However, exempted gains must still be entered in Schedule CG under Section 112A. Note that the system will adjust the exemption automatically. But leaving it blank because no tax is owed is treated as a non-disclosure.

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If you are claiming exemptions under Section 54, 54F or 54EC (for reinvestment of LTCG proceeds from sale of specified assets in another residential property or in specified capital gains bonds), then make separate disclosures in Schedule CG. The deduction is not automatic and must be explicitly claimed. Simply reducing the capital gain without completing these fields can invite questions.

Further, under the new tax regime, taxpayers with taxable income up to Rs.12 lakh pay zero tax due to the rebate available under Section 87A. However, this only applies to regular income taxed under slab rates. Capital gains are taxed separately at special rates. As such, a taxpayer may qualify for the rebate on salary but still have tax payable on equity capital gains.

Report capital losses

Do not ignore declaring capital losses, if any. Agrawal maintains, “Reporting losses is equally important, as they may be carried forward and used to offset future capital gains, subject to the provisions of the Income-tax Act. If you want to carry forward such loss, then you must file the tax return within the due date of filing the original tax return, i.e. on or before 31 July 2026 for salaried taxpayers.” Remember that a short-term loss can offset both short and long-term gains. A long-term loss offsets only long-term gains.

Finally, before filing your return, reconcile your pre-filled data with your capital gains statement, Form 26AS and Annual Information Statement (AIS). If you sold overseas investments, reporting the capital gain is only one part of compliance. Resident taxpayers may also have to complete Schedule FA (Foreign Assets) and other related schedules where applicable.