Filing ITR with Capital Gains from Shares and Mutual Funds: Step-by-Step Process

Q: How do I calculate my capital gains from shares and mutual funds?

Capital gains are calculated by subtracting the purchase price (including transaction costs like brokerage fees) from the sale price of the asset. If the holding period is less than one year, the gain is considered short-term (STCG). If the asset is held for more than one year, the gain is considered long-term (LTCG). Remember to factor in any applicable exemptions and the specific tax rates for STCG and LTCG.

Asharam Swain
a few seconds ago
9 min read

Filing an Income Tax Return (ITR) that involves capital gains from shares and mutual funds can be daunting for many taxpayers, particularly because of the nuances in the tax treatment of different types of capital gains. Understanding the correct forms to use, the tax rates applicable, and the procedures for accurate reporting is essential to ensure your compliance with tax laws. Let us explore the entire process, focusing on Assessment Year (AY) 2025-26. From selecting the right forms to collecting necessary documents, we'll provide a step-by-step breakdown so you can file your ITR without any errors, keeping your investments and taxes in check.

How to File ITR with Capital Gains from Shares and Mutual Funds?

Understand Which ITR Form to Use

Know the Tax Rates and Holding Periods

Collect Necessary Documents and Statements

Reporting Capital Gains in ITR

Set Off Capital Losses (If Any)

File and Verify Your ITR

Additional Tips and Considerations

Conclusion

FAQs

How to File ITR with Capital Gains from Shares and Mutual Funds?

To file your Income Tax Return (ITR) with capital gains from shares and mutual funds, start by selecting the appropriate ITR form, typically ITR-2 for individuals with capital gains but no business income. Report short-term capital gains (STCG) in Schedule CG and long-term capital gains (LTCG) exceeding ₹1 lakh in Schedule 112A. Ensure you have the necessary documents, such as capital gain statements, Form 26AS for TDS verification, and transaction details. After entering the correct details, set off any capital losses, if applicable, and submit the form online. Finally, verify the return using Aadhaar OTP or net banking.

Understand Which ITR Form to Use

The first and foremost step in the ITR filing process is selecting the correct form. Depending on your income sources, the tax authorities require different forms for reporting capital gains. Here's a quick guide on which form to use for your specific situation:

ITR-2: This form is applicable for individuals and Hindu Undivided Families (HUFs) who have capital gains but no business income. This is the most common form used for filing ITR when your only income comes from investments in shares and mutual funds.
ITR-3: If you have business income along with capital gains, you should use ITR-3. This form is for individuals who have income from business or profession, in addition to capital gains from the sale of shares or mutual funds.
ITR-1 or ITR-4: If your long-term capital gains (LTCG) from shares or mutual funds do not exceed ₹1.25 lakh in a financial year, you may be eligible to file using ITR-1 or ITR-4. However, capital gains typically require ITR-2, and it is advisable to use the more accurate form to avoid any discrepancies.

Each form has its unique requirements, and choosing the correct one will ensure that your tax filing is processed smoothly.

Know the Tax Rates and Holding Periods

Capital gains are classified into two categories based on the holding period of the assets involved: short-term and long-term. The tax rates for these two types of capital gains differ, and understanding these differences is crucial when filing your return:

Short-Term Capital Gains (STCG): If shares or mutual funds are sold within one year of purchase, the gains are considered short-term. STCG from equity-oriented mutual funds and listed shares is taxed at 15%. This tax rate is fixed and applicable for all taxpayers, irrespective of their income slab.
Long-Term Capital Gains (LTCG): For assets held for more than one year, the gains are considered long-term. LTCG from listed shares or equity-oriented mutual funds exceeding ₹1 lakh are taxed at 10% without the benefit of indexation (a method to adjust for inflation). However, if the gains do not exceed ₹1 lakh, they are exempt from tax.

It is important to note that tax laws have been updated, particularly after July 23, 2024, and there may be changes in how these rates are applied. For example, there are specific rules about the treatment of gains from mutual funds, which could affect your filing process. Keeping track of these changes will help you comply with the latest tax regulations.

Collect Necessary Documents and Statements

Before proceeding with the ITR filing process, gather all the required documents that are necessary for accurate reporting of capital gains. These documents include:

Capital Gain Statements: These are statements issued by mutual fund houses or Registrars and Transfer Agents (RTAs), like CAMS or KFintech. They will consolidate all the capital gains details from your mutual fund investments and will help you report your gains accurately.
Form 26AS: This form contains details of tax deducted at source (TDS) on dividends or capital gains and is issued by the Income Tax Department. It is crucial to verify the TDS deducted before filing your ITR.
Transaction Details: For shares and mutual funds, you need to have a record of the purchase and sale transactions. This will help you calculate the exact capital gains or losses that you need to report in your ITR.

By ensuring you have all the necessary documents, you reduce the chances of errors when filing your return.

Reporting Capital Gains in ITR

Once you have your documents ready, the next step is to correctly report your capital gains in the ITR form. Here’s how to do it:

Select the Right ITR Form: Log in to the Income Tax e-filing portal and choose the appropriate ITR form (usually ITR-2 for capital gains).
Report Short-Term Capital Gains (STCG): You need to report STCG under Schedule CG of the ITR form. This section will require you to fill in details about the asset sold, the amount of gain, and the tax deducted.
Report Long-Term Capital Gains (LTCG): LTCG exceeding ₹1 lakh should be reported in Schedule 112A. Here, you’ll need to specify the sale details and enter the tax calculation based on the applicable 10% rate.
Other Sources of Income: If you have earned dividends from mutual funds, report them under ‘Other Sources’. Any TDS deducted on these dividends can be claimed as a credit when filing your return.

By accurately filling out these sections, you ensure that your capital gains are reported properly, which reduces the risk of any audits or penalties.

Set Off Capital Losses (If Any)

Capital losses occur when the sale price of an asset is lower than its purchase price. You can offset these losses against capital gains, reducing your taxable income. Here’s how it works:

Long-term Capital Losses: These losses can only be offset against long-term capital gains. If you do not have any long-term gains in the current year, you can carry forward the losses to subsequent years to offset future long-term gains.
Short-term Capital Losses: These can be offset against both short-term and long-term capital gains. If you have a short-term capital loss, it provides flexibility in reducing your taxable income, regardless of the type of capital gain you have.

Setting off losses helps reduce your overall tax liability, and carrying forward unutilized losses provides future tax benefits.

File and Verify Your ITR

After accurately reporting your capital gains and filling out all necessary details, you can submit your ITR:

Submit Your ITR Online: After reviewing your form, click on the “Submit” button to file your return electronically.
Verify Your ITR: E-verification of your ITR is mandatory. You can verify your return using options such as Aadhaar OTP, net banking, or other methods available on the Income Tax Department’s portal.

Verifying your return ensures that the tax authorities acknowledge your filing, and it finalizes the submission process.

Additional Tips and Considerations

If you have not redeemed mutual fund units during the financial year, you do not need to report them in your ITR.
Ensure you keep track of buybacks, as these may require separate reporting based on the latest tax rules effective from July 23, 2024.
To avoid errors, always use consolidated capital gain statements from RTAs, as they can provide accurate details for multiple mutual funds.

Conclusion

TaxBuddy simplifies the entire process of filing ITR with capital gains from shares and mutual funds. With expert-assisted filing, seamless document upload, and real-time support, TaxBuddy ensures accurate and stress-free filing. The mobile app offers the convenience of filing anytime, anywhere, with a dedicated team to resolve tax notices and ensure compliance. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: Which ITR form should I file if I have capital gains from shares and mutual funds?

If you have capital gains from shares and mutual funds but no business income, you should file ITR-2. This form is meant for individuals and Hindu Undivided Families (HUFs) who earn income from capital gains, but not from business or profession. If you also have business income along with capital gains, then ITR-3 should be used. However, small taxpayers whose long-term capital gains (LTCG) do not exceed ₹1.25 lakh in a financial year may file ITR-1 or ITR-4, provided they meet the conditions specified by the Income Tax Department.

Q2: How are long-term and short-term capital gains from mutual funds taxed?

Short-Term Capital Gains (STCG) on equity-oriented mutual funds or listed shares, where the holding period is less than one year, are taxed at 15%. On the other hand, Long-Term Capital Gains (LTCG), which are applicable when the asset is held for more than one year, are taxed at 10% on gains exceeding ₹1 lakh in a financial year. If the LTCG does not exceed ₹1 lakh, it is exempt from tax. These tax rates are applicable only if the investments are in listed equity shares or equity-oriented mutual funds.

Q3: Do I need to report mutual fund investments if I have not redeemed units?

No, mutual fund investments only need to be reported for capital gains when the units are redeemed. If you haven’t redeemed the units during the financial year, there are no taxable gains, and hence, you do not need to report those mutual fund investments in your Income Tax Return (ITR).

Q4: Can I set off capital losses against other income?

No, capital losses can only be set off against capital gains. If you have long-term capital losses, they can only be set off against long-term capital gains. Similarly, short-term capital losses can be set off against both short-term and long-term capital gains. These set-offs help reduce your taxable income, but losses cannot be set off against other types of income, such as salary or rental income.

Q5: How does TaxBuddy assist in filing ITR for capital gains?

TaxBuddy simplifies the filing process for capital gains by offering expert-assisted filing services. It helps ensure accuracy and compliance by checking for errors, uploading necessary documents, and providing real-time support. TaxBuddy integrates seamlessly with the Income Tax Department’s e-filing portal, ensuring a stress-free experience when filing ITR for capital gains, whether it’s from shares, mutual funds, or other investments.

Q6: Can I claim deductions for capital losses in ITR?

Yes, you can claim capital losses in your ITR, but they can only be set off against capital gains. Long-term capital losses can only be set off against long-term capital gains, while short-term capital losses can be set off against both short-term and long-term capital gains. If you do not have sufficient capital gains in the current year to set off the losses, you can carry forward the unutilized losses to future years to offset against future capital gains.

Q7: How do I calculate my capital gains from shares and mutual funds?

Capital gains are calculated by subtracting the purchase price (including transaction costs like brokerage fees) from the sale price of the asset. If the holding period is less than one year, the gain is considered short-term (STCG). If the asset is held for more than one year, the gain is considered long-term (LTCG). Remember to factor in any applicable exemptions and the specific tax rates for STCG and LTCG.

Q8: What if I miss the ITR filing deadline?

If you miss the ITR filing deadline, you can still file your return as a belated return under Section 139(4). However, filing a belated return attracts a penalty, and you may not be eligible for certain tax advantages, such as carry-forward of losses or claiming certain deductions. It’s essential to file your return as soon as possible to minimize the penalties and interest for late filing.

Q9: Are dividends from mutual funds taxable?

Yes, dividends from mutual funds are taxable. If the amount exceeds ₹5,000 in a financial year, TDS (Tax Deducted at Source) is deducted at a rate of 10% under Section 194K. However, if the TDS has been deducted, you can claim a credit for the TDS in your ITR, which will be reflected in Form 26AS.

Q10: What is the exemption limit for LTCG on shares and mutual funds?

The exemption limit for Long-Term Capital Gains (LTCG) on equity shares and mutual funds is ₹1 lakh per financial year. If your LTCG exceeds ₹1 lakh, the amount exceeding this limit will be taxed at 10%. Gains up to ₹1 lakh are exempt from tax, and this exemption applies to individual taxpayers.

Q11: Can I file ITR for multiple sources of capital gains?

Yes, you can report multiple sources of capital gains in a single ITR form. This includes capital gains from shares, mutual funds, bonds, or any other investments. You just need to report each source of capital gains under the appropriate schedules (like Schedule CG for STCG and Schedule 112A for LTCG) in the ITR.

Q12: Does TaxBuddy support capital gains filing for all types of investments?

Yes, TaxBuddy supports the filing of ITR for capital gains from various investment types, including shares, mutual funds, bonds, and other securities. It ensures that all types of capital gains are reported correctly and in compliance with the latest tax regulations, providing a hassle-free filing experience for all types of investments.