As the July 31, 2026, deadline for filing Income Tax Returns (ITRs) for Assessment Year (AY) 2026-27 approaches, many taxpayers might incorrectly assume that tax-free long-term capital gains (LTCG) do not need to be reported. However, financial experts emphasize that even if your LTCG from listed shares and equity mutual funds falls within the ₹1.25 lakh exemption limit under Section 112A, it is still mandatory to disclose these gains in your ITR.
Why Reporting Tax-Exempt LTCG is Crucial
CA (Dr.) Suresh Surana highlights that the ₹1.25 lakh exemption threshold for LTCG should not be confused with the overall obligation to file an income tax return. The requirement to file an ITR is determined by separate provisions of the Income Tax Act, such as whether a taxpayer's total income crosses the basic exemption limit or if they meet other mandatory filing criteria, not solely whether tax is payable on specific gains.
Reporting tax-exempt LTCG ensures consistency with your Annual Information Statement (AIS) and Form 26AS, which are key documents used by the Income Tax Department. This practice creates a clear compliance record and significantly reduces the likelihood of receiving future notices or requests for clarification from tax authorities. As Surana states, "Even where LTCG is not taxable because it falls within the ₹1.25 lakh threshold, the gains are not exempt from disclosure. Such transactions should be appropriately reported in the ITR to ensure consistency with AIS and Form 26AS and minimise the risk of future queries from the tax authorities."
Choosing the Correct ITR Form
Selecting the right ITR form is another critical aspect. Siddharth Maurya, Founder and Managing Director of Vibhavangal Anukulakara Pvt. Ltd., points out a common error: taxpayers often choose ITR-1 (Sahaj) simply because their LTCG appears tax-exempt, without considering other disclosure requirements or the nature of their investments.
- ITR-1 (Sahaj): Generally for resident individuals with income up to ₹50 lakh and relatively simple financial profiles. It allows reporting of tax-exempt LTCG up to ₹1.25 lakh, provided there are no brought-forward or carried-forward capital losses and no complex capital gain transactions.
- ITR-2: Required for individuals not eligible for ITR-1. This includes taxpayers with capital losses to carry forward, gains from assets like real estate or gold, foreign assets or income, agricultural income above ₹5,000, directorships, unlisted shares, ESOP-related disclosures, or a total income exceeding ₹50 lakh.
"A common misstep is picking ITR-1 just because the LTCG looks tax-exempt, without verifying what the investments really are and without making the necessary disclosures," Maurya cautions.
Consequences of Non-Disclosure
Failure to report tax-exempt LTCG, even if it doesn't immediately create a tax liability, can lead to significant issues. Discrepancies between your filed ITR and information reflected in AIS, Form 26AS, or broker statements can trigger automated communications, e-verification queries, scrutiny notices, or requests for clarification from the Income Tax Department. Maintaining a transparent financial trail through proper disclosure is essential to prevent avoidable compliance problems during future assessments.