How to file ITR for capital gains: the ITR-2 guide for stock investors

Why ITR-1 will not work for capital gains

ITR-1 (Sahaj), the simplest income tax return form, is restricted to taxpayers whose income comes only from salary or pension, one house property (no brought-forward losses), and other sources (interest income, family pension) — with total income not exceeding ₹50 lakh. It cannot accommodate capital gains of any kind.

If you sold even a single equity mutual fund unit or a single share during the financial year — whether at a gain or at a loss — you are disqualified from using ITR-1. This surprises many first-time investors who assume that a small transaction or a loss wouldn't matter. It does, both for proper tax reporting and, critically, to preserve your right to carry forward any capital losses.

ITR-2 is the standard form for most retail equity investors. It handles salary income, capital gains (STCG and LTCG), dividend income (Schedule OS), and foreign assets. If you also have intraday or F&O trading income, you need ITR-3 because those are treated as business income. A salaried employee who dabbles in delivery-based equity investing uses ITR-2. One who trades intraday or in futures and options uses ITR-3.

The structure of ITR-2 that matters for investors

ITR-2 has several schedules. The ones most relevant to an equity investor are:

• Schedule CG (Capital Gains): where all capital gains and losses from stocks, mutual funds, real estate, and other assets are reported and computed. This is the heart of the filing for investors.
• Schedule OS (Other Sources): where dividend income (from domestic and foreign companies), IDCW from mutual funds, interest on savings accounts, and other miscellaneous income is reported.
• Schedule CYLA (Current Year Loss Adjustment): where you set off current-year losses against current-year gains across heads.
• Schedule BFLA (Brought Forward Loss Adjustment): where you apply losses carried forward from earlier years.
• Schedule CFL (Carry Forward of Losses): where remaining unadjusted losses are recorded for carry forward to future years.
• Schedule VDA: for Virtual Digital Assets (crypto) — relevant if you have any crypto transactions.
• Schedule FSI and Schedule TR: for income from foreign sources and corresponding tax relief if you hold foreign stocks.

Step 1: Gather all your data before you open the utility

Filing a complete and accurate ITR-2 requires collecting data from multiple sources. Attempting to file without all of these significantly increases the chance of errors, mismatches, and notices.

Annual Information Statement (AIS): Download this from the income tax e-filing portal (incometax.gov.in → AIS tab). It shows all transactions reported by third parties — broker sale proceeds, dividend receipts, TDS deducted, bank interest, and more. Check it for accuracy; if a transaction is incorrect, you can raise a feedback within the AIS portal. Note that AIS shows sale proceeds but not cost basis — you must supply the cost.

Form 26AS: The older tax credit statement. Primarily useful for verifying TDS credits. Download from the income tax portal or TRACES. Any TDS shown in 26AS but missing from AIS should be investigated before filing.

Broker tax P&L statement: Every registered broker provides this annually, typically available through the broker's back-office portal. It classifies all transactions into STCG, LTCG, speculative (intraday), and sometimes F&O. Reconcile this against the AIS for completeness. Be aware that different brokers compute FIFO cost basis differently for accounts with multiple purchase lots at different prices.

Consolidated Account Statement (CAS): For mutual fund transactions, download the CAS from CAMS (camsonline.com) or KFintech (kfintech.com) covering all AMCs. The CAS lists every purchase, redemption, SWP, dividend, and switch. A switch between two schemes in the same fund house is a taxable redemption — many investors miss this.

Historical purchase contract notes: For shares held for several years, your broker's system may not have the original purchase price if the shares were transferred from another broker or CDSL/NSDL. In these cases, original contract notes or allotment letters are necessary to establish cost basis. For shares acquired before 1 February 2018, you also need the 31 January 2018 fair market value for grandfathering.

Step 2: Compute LTCG and STCG separately

Schedule CG requires separate computation for different types of capital assets and different tax rates. For listed equity:

Long-term capital gains (Section 112A): Positions held for more than 12 months. For each scrip or fund, the gain is sale consideration minus the cost of acquisition (with grandfathering applied where relevant) minus transfer expenses. Aggregate all LTCG transactions. The ₹1.25 lakh exemption applies to the net figure.

Short-term capital gains (Section 111A): Positions held for 12 months or less. No exemption. All gains taxable at 20% (or 15% for transactions before 23 July 2024 in FY 2024-25). Aggregate all STCG transactions separately from LTCG.

Do not mix LTCG and STCG in the same row. The ITR utility has separate sections for each, and applying the wrong rate results in incorrect tax computation.

Step 3: Apply grandfathering for pre-2018 holdings

For shares acquired before 1 February 2018 and sold on or after that date, the cost of acquisition is the higher of:

1. The actual purchase price, or
2. The fair market value of the share as on 31 January 2018 — defined as the highest price traded on that date (or the preceding trading day if it was a holiday)

This stepped-up cost is then capped at the actual sale price if the sale price is lower (to prevent artificial losses under the grandfathering formula). The net effect: gains that accrued before 31 January 2018 are not subject to LTCG tax.

The ITR utility has a separate column for "Fair market value as on 31 January 2018" in the LTCG section. You must look up this value from BSE/NSE historical data or from your broker if they provide it. For mutual funds, AMFI published NAVs as on 31 January 2018 on its website. Entering this correctly is important for long-held positions purchased many years before 2018.

Step 4: Set-off losses and carry forward

Once individual gains and losses are computed, the ITR utility assists with the set-off hierarchy, but understanding it manually helps catch errors:

• Short-term capital losses (STCL) on listed equity can be set off against both STCG and LTCG in the current year (Schedule CYLA).
• Long-term capital losses (LTCL) on listed equity can only be set off against LTCG — not against STCG.
• Losses from one asset class (e.g., unlisted shares) can also be set off, subject to their own rules. The utility handles cross-asset set-off automatically if you enter all assets correctly.
• After current-year set-off, any remaining capital losses are carried forward in Schedule CFL. These can be set off against future capital gains for up to 8 financial years.

Brought-forward losses from prior years appear in Schedule BFLA. You must enter the year of origination and the type (STCL or LTCL) of each carried-forward loss. These are populated from the CFL schedule of your prior year's return — another reason to keep copies of filed returns.

Advance tax: 234B and 234C

If your total tax liability for the year (including tax on capital gains) is ₹10,000 or more, you are required to pay advance tax. The four instalment due dates are 15 June (15%), 15 September (45%), 15 December (75%), and 15 March (100%).

Two interest sections apply if you fall short:

• Section 234B: Charged if advance tax paid is less than 90% of the assessed tax. Interest accrues at 1% per month from 1 April of the assessment year until the date of payment. Even a small shortfall over several months can add up to a meaningful amount.
• Section 234C: Charged for deferring each instalment. If you paid less than 45% of your total tax by 15 September, for instance, 234C interest applies at 1% per month for 3 months on the deficiency.

The one concession for capital gains: if capital gains arise after 15 March of the financial year, the entire tax on those gains can be paid by 31 March without attracting 234C interest. This covers investors who sell in late March. For capital gains realised earlier in the year, the normal advance tax schedule applies — estimate conservatively after each quarter based on realised transactions.

Common mistakes that attract notices

Based on the types of discrepancies the income tax department routinely flags in notices, these are the errors that come up most frequently for equity investors:

• Missing mutual fund switches.When you switch from one scheme to another within the same AMC or across AMCs, the income tax system treats it as a redemption (taxable) and a fresh purchase. Many investors — and even some broker P&L reports — omit switches. The AIS will show the redemption proceeds; if your ITR doesn't account for it, expect a notice.
• Ignoring BTST (Buy Today, Sell Tomorrow). These one-day holding positions are often omitted from capital gains calculations because investors mentally categorise them as intraday — which they are not from a delivery standpoint. BTST gains are generally treated as STCG and must be reported.
• Using incorrect FIFO lot assignment.Most brokers use FIFO (first-in, first-out) for assigning which purchase lots are sold. If you calculate gains manually using a different lot selection method, the mismatch between your ITR and the broker's AIS report can raise red flags.
• Failing to report dividend income.Since DDT abolition in FY 2020-21, dividends show up in AIS. Many investors still assume dividends are tax-free and don't report them.
• Forgetting grandfathering for old holdings. Without entering the 31 January 2018 FMV, the utility computes LTCG on the full historical gain including pre-2018 appreciation, overstating your tax liability.
• Missing bonus shares and splits. Bonus shares received have a cost of acquisition of zero (for shares received after 1 April 2001) and a holding period counted from the date of allotment — not the date of original share acquisition. Stock splits change the per-share cost but not the total cost basis.
• Not reconciling with AIS before filing. Mismatch between the ITR and AIS data is one of the most common triggers for e-verification notices and processing errors.

Due dates: original, belated, and revised returns

For non-audit individual taxpayers, the filing due dates are:

• Original return: 31 July of the assessment year (so 31 July 2026 for FY 2025-26).
• Belated return: A return filed after 31 July but before 31 December of the assessment year is a belated return under Section 139(4). A belated return forfeits the right to carry forward capital losses (other than depreciation losses). A late filing fee of ₹1,000 (for income up to ₹5 lakh) or ₹5,000 (for income above ₹5 lakh) applies under Section 234F.
• Revised return: If you filed on time but need to correct a mistake, a revised return can be filed up to 31 December of the assessment year. A revised return retains the carry-forward benefit of the original timely filing.

These dates are for individuals not subject to tax audit. Entities subject to audit (e.g., those with business turnover above ₹1 crore or professional receipts above ₹50 lakh) have different, later deadlines.

Where to go next

For a deeper understanding of the LTCG computation rules — including the ₹1.25 lakh exemption, grandfathering mechanics, and surcharge rates — see the LTCG guide. For the short-term side — 20% flat rate, no exemption, intraday vs delivery distinction — see the STCG guide. For dividend taxation and TDS, see the dividend tax guide. Use the LTCG/STCG calculator to estimate your tax before the ITR filing season opens.

This article is educational only and does not constitute tax or investment advice. Tax laws change; please verify with a chartered accountant or refer to the latest CBDT circulars before filing your return. EquitiesIndia.com is not liable for any reliance placed on this article.