Made over Rs 1.25 lakh in equity gains? Here's why ITR-1 may not be enough this year

Before filing your return, it is worth checking your capital gains statement carefully to ensure you choose the correct ITR form and avoid unnecessary notices or delays.

In Short

• ITR-1 now allows LTCG reporting up to Rs 1.25 lakh for AY 2026-27
• Gains beyond Rs 1.25 lakh require filing ITR-2 with Schedule CG details
• Check capital gains and income type carefully to choose the right ITR form

Choosing the right Income Tax Return (ITR) form isn't always as straightforward as it seems. This year, many salaried taxpayers are discovering that a small change in the rules has made ITR-1 more useful, but only up to a point. If you earned long-term capital gains from equity shares or equity mutual funds that crossed Rs 1.25 lakh during the financial year, you may have to move beyond the simpler ITR-1 and file ITR-2 instead.

Here's what the rules say for Assessment Year (AY) 2026-27.

WHY ITR-1 IS NOT THE RIGHT FORM ONCE GAINS CROSS Rs 1.25 LAKH

For AY 2026-27, the government has widened the scope of ITR-1 (Sahaj), giving relief to many small investors. Resident individuals can now report long-term capital gains (LTCG) under Section 112A from listed equity shares and equity-oriented mutual funds in ITR-1, provided those gains do not exceed Rs 1.25 lakh.

This is a significant change because, until last year, any capital gains from these investments generally meant filing ITR-2.

However, relaxation comes with one important condition. The moment your long-term capital gains under Section 112A exceed Rs 1.25 lakh, ITR-1 is no longer available. In that case, you must file ITR-2 and disclose the details of your gains under Schedule CG.

WHY THE Rs 1.25 LAKH FIGURE MATTERS

The Rs 1.25 lakh limit is not an arbitrary number. It is also the exemption threshold under Section 112A for long-term capital gains from listed equity shares and equity-oriented mutual funds.

In simple terms, gains up to Rs 1.25 lakh remain tax-free under this provision. But if your gains go beyond that amount, the excess becomes taxable at 12.5 per cent. Since tax becomes payable, the Income Tax Department requires taxpayers to report these gains through ITR-2 instead of ITR-1.

WHO CAN FILE ITR-2?

ITR-2 is meant for individuals, whether residents or non-residents, and Hindu Undivided Families (HUFs) that do not have income from business or profession.

The form can be used by taxpayers earning income from salary or pension, house property, capital gains and other sources such as interest or lottery winnings. It also applies where agricultural income exceeds Rs 5,000.

Unlike ITR-1, there is no upper limit on total income for filing ITR-2. Even taxpayers with income above Rs 50 lakh can use this form, provided they do not have business income.

The form is also compulsory for individuals who were directors in a company during the financial year or held unlisted equity shares at any point during the year.

Meanwhile, the Central Board of Direct Taxes (CBDT) has made two notable changes to ITR-1 for AY 2026-27.

The first change benefits small retail investors. They can now report eligible long-term capital gains under Section 112A within ITR-1, as long as those gains do not exceed Rs 1.25 lakh and there are no brought-forward or carry-forward capital losses.

The second change relates to house property income. Earlier, taxpayers with more than one house property usually had to file ITR-2. From AY 2026-27, resident individuals can report income from up to two house properties in ITR-1, making the form accessible to a larger number of salaried taxpayers.

In other words, if you earn a salary, own one house property and your long-term capital gains from equity shares or equity mutual funds exceed Rs 1.25 lakh, ITR-2 is the correct return form for AY 2026-27.

The same applies if you have short-term capital gains, gains from assets such as property, gold or debt mutual funds, or capital losses that need to be carried forward. Before filing your return, it is worth checking your capital gains statement carefully to ensure you choose the correct ITR form and avoid unnecessary notices or delays.

- Ends