Archive · 23 Jul 2026
ITR-1 vs ITR-2 for Tax-Exempt Capital Gains
If you sold shares or mutual funds and made money, you might think you don't need to report it if the gains are below ₹1.25 lakh.
But tax experts say you still need to report these gains, even if no tax is due.
Using the wrong tax form (ITR-1 instead of ITR-2) can cause problems like delays in refunds or notices from the tax department.
It's important to choose the right form based on the type of income, not just whether tax is payable.
Taxpayers with long-term capital gains (LTCG) below ₹1.25 lakh exemption limit must still report them in their income tax return.
Choosing the wrong ITR form (ITR-1 instead of ITR-2) can lead to defective returns, refund delays, and compliance issues.
The Income Tax Department relies on information from exchanges, mutual funds, and other entities to verify reported income.
Non-reporting of LTCG can result in notices, AIS/Form 26AS discrepancies, and problems during future assessments.
Common mistakes include choosing ITR-1 based on tax liability rather than the nature of income.
- Who
- Taxpayers with long-term capital gains from equity shares and mutual funds
- What
- Filing the correct income tax return form (ITR-1 vs ITR-2) for tax-exempt capital gains
- When
- During the financial year when capital gains are realized
- Where
- India
- Why
- To ensure compliance with tax laws and avoid potential notices and discrepancies
Filing ITR-1 for Tax-Exempt Gains
Filing ITR-2 for Tax-Exempt Gains
Eligibility Based on Income Type
Filing ITR-1 for Tax-Exempt Gains
Taxpayers believe they can file ITR-1 if their long-term capital gains (LTCG) are below the ₹1.25 lakh exemption limit, as no tax is payable.
Filing ITR-2 for Tax-Exempt Gains
Tax experts argue that the eligibility for an ITR form depends on the nature of income, not just tax liability. Even if no tax is due, LTCG must be reported.
Consequences of Incorrect Filing
Filing ITR-1 for Tax-Exempt Gains
Filing ITR-1 may lead to a defective return, refund delays, or additional compliance issues if LTCG is not reported.
Filing ITR-2 for Tax-Exempt Gains
Filing ITR-2 ensures compliance with tax laws, avoiding potential notices and discrepancies in AIS/Form 26AS.
- Exemption Limit
- ₹1.25 lakh under Section 112A
- ITR Forms
- ITR-1 and ITR-2
- Capital Gains Reporting
- Required even if tax-exempt
- Consequences of Non-Reporting
- Potential notices, AIS/Form 26AS discrepancies, and compliance issues
- Common Mistakes
- Choosing ITR-1 based on tax liability rather than income type