First-time taxpayer? One mistake in your capital gains report could trigger a tax notice
Filing income tax returns for the first time can be daunting, particularly when dealing with capital gains. It is crucial to accurately report capital gains from activities such as selling shares, redeeming mutual funds, or disposing of property in order to comply with tax regulations and prevent potential audit inquiries in the future.
- May 15, 2025,
- Updated May 15, 2025 1:47 PM IST
The annual tax season is upon us, prompting the familiar task of preparing to submit your Income Tax Return (ITR). For a wide range of taxpayers, including employees, freelancers, business owners, and investors, accurately and promptly filing your return is both a legal requirement and an opportunity to manage your finances effectively.
Before beginning the process, it is essential to remember two key points. Firstly, ensure that your Aadhaar is connected to your PAN. Linking your Aadhaar number to your PAN is obligatory for filing ITR. Neglecting to do so may result in an inactive PAN and complications during the filing process.
Secondly, the selection of the appropriate ITR form is crucial. The Income Tax Department offers different forms tailored to different taxpayer categories. The Central Board of Direct Taxes (CBDT) has notified all seven Income Tax Return (ITR) forms for Assessment Year 2025-26, reflecting key changes in capital gains reporting. These updates align with amendments introduced in the Union Budget 2024, which took effect from July 23, 2024, and include revised rules for long-term capital gains (LTCG) taxation.
Capital gains tax reporting
Filing income tax returns for the first time can be overwhelming, especially when capital gains are involved. Whether you're selling shares, redeeming mutual funds, or disposing of property, reporting capital gains accurately is essential to stay compliant with tax laws and avoid future scrutiny. For first-time taxpayers, understanding the classification, computation, and disclosure of capital gains under the Income-Tax Act, 1961, is not just helpful—it’s necessary.
Capital gains taxation comes into play when a capital asset is sold for a profit. These profits, depending on the type and holding period of the asset, are classified as either short-term or long-term capital gains, each with distinct tax treatments. First-time filers must also select the correct ITR form—typically ITR-2 or ITR-3—and ensure that all sale transactions are correctly disclosed under Schedule CG. Failing to match these details with the Annual Information Statement (AIS) or Form 26AS may invite notices or audits from the tax department.
From identifying the right exemptions under Sections 54, 54EC, or 112A to properly disclosing gains from ESOPs or bonus shares, the process demands careful documentation and attention to detail. This guide helps new taxpayers file smarter, not harder.
"Capital gains taxation is a critical component of income tax compliance particularly relevant for taxpayers transacting in securities, immovable property, and other capital assets. For first-time taxpayers, understanding the intricacies of capital gains reporting within the ITR framework is essential to ensure accuracy, avoid litigation, and optimize available exemptions," said CA Dr Suresh Surana.
Here are some crucial tips for reporting capital gains tax this assessment year:
Ø Gain an understanding of the Classification and Tax Treatment of Capital Gains
Capital gains arise when a capital asset is transferred for consideration exceeding its indexed or non-indexed cost of acquisition. The classification of such gains as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) is based on the holding period and the nature of the asset. For instance gains from Listed equity shares and equity mutual funds would be categorised as short term if held for upto 12 months and taxed at 20% under Section 111A whereas such gains would be treated as long term if held for more than 12 months and taxed at 12.5% under Section 112A (exempt up to Rs. 1.25 lakh annually). Accurate classification is the foundation of correct reporting and tax computation.
Ø Selection of Appropriate ITR Form and Disclosure Schedule
Correct selection of the Income Tax Return (ITR) form is important. Taxpayers having income from capital gains but no business income must use ITR-2, whereas those also engaged in business or professional activity must file ITR-3. Within the chosen form, Schedule CG is dedicated to capital gains disclosure which requires detailed reporting on the following:
· Type of asset transferred
· Date of acquisition and sale
· Sale consideration and full value of consideration
· Indexed cost (for LTCG where applicable)
· Exemption claimed under relevant sections
Before finalising entries in Schedule CG, taxpayers must ensure that all capital gains disclosures are reconciled with the data reflected in Form 26AS, the Annual Information Statement (AIS), and the Taxpayer Information Summary (TIS) as any failure to provide correct details, especially in high-value or property-related transactions, increases the risk of scrutiny.
Ø Reporting of Exemptions and Set-Off Provisions
The IT Act provides specific exemptions for long-term capital gains if the proceeds are reinvested in specified avenues. For instances, Section 54 allows exemption when LTCG from sale of a residential property is reinvested in another residential property. Section 54EC permits investment of specified capital gains in specified bonds (such as RECL) within 6 months, up to a maximum of Rs. 50 lakh. Further, taxpayers can set off eligible capital losses against gains, and carry them forward for up to 8 years, provided the return is filed within the due date under Section 139(1).
Ø Reporting Special Scenarios: ESOPs, Bonus Shares, etc.
Certain capital gains transactions require special treatment which taxpayers needs to consider at the tile of capital gains reporting. For instance, ESOPs are taxed as perquisites at the time of exercise, and subsequent gains on sale are reported as capital gains. Bonus shares are treated as having zero cost of acquisition, affecting gain computation at the time of sale. Errors in reporting such transactions can lead to mismatches with data in the Annual Information Statement (AIS).
Ø Maintaining Documentation
Maintaining robust documentation is critical for both reporting accuracy and audit preparedness. Taxpayers should preserve demat account statements, broker contract notes, transaction summaries etc. for market-linked securities. In the case of real estate, registered sale and purchase agreements, stamp duty payment receipts, and records of cost of improvement must be retained. These documents serve enable in computing correct capital gains and can also be produced in case of potential assessment or scrutiny.
The annual tax season is upon us, prompting the familiar task of preparing to submit your Income Tax Return (ITR). For a wide range of taxpayers, including employees, freelancers, business owners, and investors, accurately and promptly filing your return is both a legal requirement and an opportunity to manage your finances effectively.
Before beginning the process, it is essential to remember two key points. Firstly, ensure that your Aadhaar is connected to your PAN. Linking your Aadhaar number to your PAN is obligatory for filing ITR. Neglecting to do so may result in an inactive PAN and complications during the filing process.
Secondly, the selection of the appropriate ITR form is crucial. The Income Tax Department offers different forms tailored to different taxpayer categories. The Central Board of Direct Taxes (CBDT) has notified all seven Income Tax Return (ITR) forms for Assessment Year 2025-26, reflecting key changes in capital gains reporting. These updates align with amendments introduced in the Union Budget 2024, which took effect from July 23, 2024, and include revised rules for long-term capital gains (LTCG) taxation.
Capital gains tax reporting
Filing income tax returns for the first time can be overwhelming, especially when capital gains are involved. Whether you're selling shares, redeeming mutual funds, or disposing of property, reporting capital gains accurately is essential to stay compliant with tax laws and avoid future scrutiny. For first-time taxpayers, understanding the classification, computation, and disclosure of capital gains under the Income-Tax Act, 1961, is not just helpful—it’s necessary.
Capital gains taxation comes into play when a capital asset is sold for a profit. These profits, depending on the type and holding period of the asset, are classified as either short-term or long-term capital gains, each with distinct tax treatments. First-time filers must also select the correct ITR form—typically ITR-2 or ITR-3—and ensure that all sale transactions are correctly disclosed under Schedule CG. Failing to match these details with the Annual Information Statement (AIS) or Form 26AS may invite notices or audits from the tax department.
From identifying the right exemptions under Sections 54, 54EC, or 112A to properly disclosing gains from ESOPs or bonus shares, the process demands careful documentation and attention to detail. This guide helps new taxpayers file smarter, not harder.
"Capital gains taxation is a critical component of income tax compliance particularly relevant for taxpayers transacting in securities, immovable property, and other capital assets. For first-time taxpayers, understanding the intricacies of capital gains reporting within the ITR framework is essential to ensure accuracy, avoid litigation, and optimize available exemptions," said CA Dr Suresh Surana.
Here are some crucial tips for reporting capital gains tax this assessment year:
Ø Gain an understanding of the Classification and Tax Treatment of Capital Gains
Capital gains arise when a capital asset is transferred for consideration exceeding its indexed or non-indexed cost of acquisition. The classification of such gains as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) is based on the holding period and the nature of the asset. For instance gains from Listed equity shares and equity mutual funds would be categorised as short term if held for upto 12 months and taxed at 20% under Section 111A whereas such gains would be treated as long term if held for more than 12 months and taxed at 12.5% under Section 112A (exempt up to Rs. 1.25 lakh annually). Accurate classification is the foundation of correct reporting and tax computation.
Ø Selection of Appropriate ITR Form and Disclosure Schedule
Correct selection of the Income Tax Return (ITR) form is important. Taxpayers having income from capital gains but no business income must use ITR-2, whereas those also engaged in business or professional activity must file ITR-3. Within the chosen form, Schedule CG is dedicated to capital gains disclosure which requires detailed reporting on the following:
· Type of asset transferred
· Date of acquisition and sale
· Sale consideration and full value of consideration
· Indexed cost (for LTCG where applicable)
· Exemption claimed under relevant sections
Before finalising entries in Schedule CG, taxpayers must ensure that all capital gains disclosures are reconciled with the data reflected in Form 26AS, the Annual Information Statement (AIS), and the Taxpayer Information Summary (TIS) as any failure to provide correct details, especially in high-value or property-related transactions, increases the risk of scrutiny.
Ø Reporting of Exemptions and Set-Off Provisions
The IT Act provides specific exemptions for long-term capital gains if the proceeds are reinvested in specified avenues. For instances, Section 54 allows exemption when LTCG from sale of a residential property is reinvested in another residential property. Section 54EC permits investment of specified capital gains in specified bonds (such as RECL) within 6 months, up to a maximum of Rs. 50 lakh. Further, taxpayers can set off eligible capital losses against gains, and carry them forward for up to 8 years, provided the return is filed within the due date under Section 139(1).
Ø Reporting Special Scenarios: ESOPs, Bonus Shares, etc.
Certain capital gains transactions require special treatment which taxpayers needs to consider at the tile of capital gains reporting. For instance, ESOPs are taxed as perquisites at the time of exercise, and subsequent gains on sale are reported as capital gains. Bonus shares are treated as having zero cost of acquisition, affecting gain computation at the time of sale. Errors in reporting such transactions can lead to mismatches with data in the Annual Information Statement (AIS).
Ø Maintaining Documentation
Maintaining robust documentation is critical for both reporting accuracy and audit preparedness. Taxpayers should preserve demat account statements, broker contract notes, transaction summaries etc. for market-linked securities. In the case of real estate, registered sale and purchase agreements, stamp duty payment receipts, and records of cost of improvement must be retained. These documents serve enable in computing correct capital gains and can also be produced in case of potential assessment or scrutiny.