How to Report Capital Gains Correctly and Avoid Tax Notices Under Section 143(1)

Incorrect reporting of capital gains often leads to tax notices under Section 143(1), primarily due to mismatches in your ITR and AIS/26AS data. Ensuring accurate classification, calculation, and disclosure of gains from shares, mutual funds, or property is critical. Each detail—sale value, indexed cost, exemptions—must align precisely with supporting documentation and government data records. Filing through the correct ITR form, such as ITR-2, and reconciling figures before submission can help avoid compliance issues and safeguard against penalties.

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Table of Contents

• What are Capital Gains?

• Capital Gains Reporting: Step-by-Step Guide

• How to Choose the Right ITR Form for Capital Gains

• Avoiding Section 143(1) Notices: Common Triggers and Fixes

• Matching Capital Gains with AIS and Form 26AS

• Reporting Exemptions under Section 54, 54EC, and 54F

• How to Handle Capital Gains from Multiple Asset Classes

• Claiming TDS Credit on Property Sales

• Common Mistakes While Reporting Capital Gains

• Role of TaxBuddy in Simplifying Capital Gains Reporting

• Conclusion

• FAQs

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What are Capital Gains?

Capital gains arise when capital assets like shares, real estate, or mutual funds are sold at a price higher than their purchase value. These gains are categorized as:

1. Short-Term Capital Gains (STCG): Assets held for less than 36 months (property) or 12 months (listed shares/mutual funds).

2. Long-Term Capital Gains (LTCG): Assets held longer than the above periods.Both types are taxable and must be reported under the “Capital Gains” head in your ITR.

Capital Gains Reporting: Step-by-Step Guide

1. Identify the Type of Gain: Determine if it’s STCG or LTCG based on the holding period.

2. Calculate Sale Proceeds: Use actual sale price, deduct brokerage and transfer costs.

3. Compute Indexed Cost (for LTCG): Adjust the purchase price using Cost Inflation Index.

4. Apply Exemptions: Check eligibility under Sections 54, 54F, or 54EC.

5. Use the Correct Schedule: Enter details in “Schedule Capital Gains” in the ITR.

6. Reconcile with AIS/26AS: Match transaction details before filing.

7. File and Verify: Submit the return and complete e-verification.

How to Choose the Right ITR Form for Capital Gains

For individuals with income from capital gains (but no business income), ITR-2 is the appropriate form. It includes a separate section to declare STCG and LTCG from different asset classes. Salaried individuals with capital gains should avoid ITR-1 and switch to ITR-2 to ensure compliance.

Avoiding Section 143(1) Notices: Common Triggers and Fixes

Notices under Section 143(1) arise when the Income Tax Department detects discrepancies between your ITR and data in AIS or Form 26AS. Common triggers include:

• Mismatched sale values

• Non-reporting of exempt gains

• Incorrect exemption claims

• Omissions in reporting asset classes

Fixes:

• Always reconcile your data

• Report exempt income under the correct heads

• Disclose all details transparently—even for exempt or low-value gains

Matching Capital Gains with AIS and Form 26AS

Before filing, download your AIS and Form 26AS from the income tax portal. Cross-check sale and purchase values, TDS, and asset details. Any inconsistency—such as a lower reported sale value in ITR than AIS—can automatically trigger a Section 143(1) adjustment.

Reporting Exemptions under Section 54, 54EC, and 54F

Exemptions on long-term capital gains (LTCG) under Sections 54, 54EC, and 54F offer significant tax relief when the gains or sale proceeds are reinvested in specific assets. However, these benefits come with conditions related to timing, type of asset, and reporting requirements. To claim them successfully, taxpayers must disclose all relevant information accurately in their Income Tax Return (ITR).

Section 54: Reinvestment in a Residential House

Applicable when a long-term capital asset—a residential house property—is sold and the capital gains are reinvested into purchasing or constructing another residential house.

Key Conditions:

• The sold asset must be a long-term residential property.

• The new property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years from the date of sale.

• The exemption is limited to the amount reinvested or the capital gain, whichever is lower.

Reporting in ITR:

• Use ITR-2 and enter details under the “Schedule Capital Gains.”

• Provide:

• Date of sale and purchase/construction

• Cost and address of the new house

• Amount of exemption claimed under Section 54

• Retain documents such as sale deeds, purchase deeds, construction bills, and bank statements for verification.

Section 54EC: Investment in Specified Bonds (NHAI/REC)

This exemption applies when LTCG arising from the sale of land or building is invested in specified capital gain bonds.

Key Conditions:

• Investment must be made within 6 months from the date of transfer.

• Maximum investment eligible for exemption is ₹50 lakh in a financial year.

• Bonds must be held for at least 5 years (formerly 3 years).

Eligible Bonds:

• NHAI (National Highways Authority of India)

• REC (Rural Electrification Corporation Limited)

Reporting in ITR:

• Declare the original LTCG in the Schedule Capital Gains section.

• Enter the amount invested in 54EC bonds and date of investment.

• Supporting documents include bond certificates, bank proof of purchase, and capital gain computation.

Section 54F: Reinvestment of Entire Sale Proceeds in a House Property

This section offers exemption on LTCG earned from selling any capital asset other than a residential house, provided the entire net sale consideration is reinvested in a residential house.

Key Conditions:

• Assessee must not own more than one residential house at the time of transfer (excluding the new one).

• Entire sale consideration—not just capital gain—must be reinvested.

• The new residential house must be purchased or constructed within the same timelines as Section 54.

• Proportional exemption is allowed if only part of the sale consideration is reinvested.

Reporting in ITR:

• Use ITR-2 and report under the appropriate asset type in Schedule Capital Gains.

• Provide:

• Type of asset sold (e.g., shares, land, gold)

• Date of purchase and sale

• Details of the new residential house, including cost and address

• Amount of exemption claimed under Section 54F

Common Reporting Requirements Across All Three Sections:

• Declare each exemption separately in the ITR form.

• Ensure the capital gains calculations match AIS/26AS data.

• Keep digital or physical copies of sale deeds, reinvestment proofs, property registration papers, and bond certificates.

• Ensure accurate dates are mentioned to prove timely reinvestment.

• Report under the right schedules in ITR-2 with complete breakdowns to avoid processing errors or Section 143(1) notices.

Accurate disclosure of exemptions under Section 54, 54EC, and 54F not only reduces your tax liability but also ensures compliance. Expert assistance from platforms like TaxBuddy can help avoid reporting errors and simplify exemption claims with automated checks and expert validation.

How to Handle Capital Gains from Multiple Asset Classes

In ITR-2’s “Schedule Capital Gains”:

Segregate gains from equity, property, and mutual funds.

• Mention STCG and LTCG separately.

• Provide acquisition and sale details for each asset.

• Apply correct cost and exemption rules for each asset type.

Claiming TDS Credit on Property Sales

If TDS is deducted by the buyer on a property transaction:

• Report gross sale value under capital gains.

• Claim TDS under “TDS on Sale of Property” in your ITR.

• Ensure the TDS reflects in Form 26AS before claiming credit.

Common Mistakes While Reporting Capital Gains

1. Using ITR-1 Instead of ITR-2

 Many salaried individuals unknowingly use ITR-1, thinking it’s suitable for all income types. However, ITR-1 does not support capital gains reporting. If you’ve sold shares, mutual funds, or property during the year, you must use ITR-2. Filing ITR-1 in such cases results in incomplete disclosures, and your return is likely to be flagged for mismatch or omission by the tax department.

2. Skipping Low-Value Gains Thinking They’re Exempt

A common misconception is that if capital gains are small or below the taxable limit, they can be ignored. However, the Income Tax Act mandates disclosure of all gains, even if the resulting tax liability is nil or exempt under Sections 54 or 54F. Omitting these transactions creates a mismatch with your AIS, which may lead to an automated adjustment or notice under Section 143(1).

3. Incorrect Cost Inflation Index (CII) Usage for Indexation

For Long-Term Capital Gains (LTCG), taxpayers are allowed to adjust the cost of acquisition using the Cost Inflation Index. Many filers use the wrong financial year’s CII or fail to apply indexation at all. This leads to inflated capital gains, higher tax liability, or inaccurate reporting. Any inconsistency here can be caught during backend processing, especially when the sale is reported differently in AIS or by the buyer.

4. Missing Exemption Claims or Failing to Attach Relevant Details

Claiming exemptions under Sections 54, 54EC, or 54F requires precise disclosure in the ITR form, including the investment amount, asset details, and timelines. Taxpayers often skip these details or fail to claim the exemption entirely. In other cases, exemption amounts are claimed without documentary proof or clarity in the ITR. This reduces the effectiveness of the claim and may prompt a scrutiny or adjustment notice.

5. Not Reconciling with AIS or Form 26AS

AIS (Annual Information Statement) and Form 26AS now reflect detailed financial data including property sales, share transactions, and TDS details. If the values reported in your ITR don’t match these government records, a red flag is raised automatically. Many taxpayers don’t cross-verify this data before filing, leading to Section 143(1) intimation notices highlighting discrepancies and revised tax demands.

Role of TaxBuddy in Simplifying Capital Gains Reporting

TaxBuddy offers expert-assisted ITR filing that ensures all capital gains—across shares, mutual funds, or property, are accurately reported and reconciled with AIS. It calculates indexation, applies exemptions, verifies forms, and eliminates common errors that lead to tax notices. Whether you're a salaried investor or a high-volume trader, TaxBuddy simplifies reporting with AI-driven precision and human support.

Conclusion

Accurate capital gains reporting protects taxpayers from compliance issues and Section 143(1) notices. Always use the correct ITR form, reconcile data with AIS/26AS, apply exemptions precisely, and submit well-documented returns. For anyone seeking clarity and compliance, it's wise to use expert platforms. For a seamless, secure, and accurate tax filing experience, download the TaxBuddy mobile app.

FAQs

Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?

TaxBuddy offers both self-filing options for confident taxpayers and expert-assisted plans for those who prefer professional help. Users can choose based on their comfort level with capital gains reporting and tax complexities.

Q2. Which is the best site to file ITR?

 TaxBuddy is among the top-rated platforms in India for ITR filing. It’s an authorized e-Return Intermediary (ERI) of the Government of India, offering AI-driven tax filing with expert support, especially for complex scenarios like capital gains.

Q3. Where to file an income tax return?

Returns can be filed on the official Income Tax portal (incometax.gov.in) or through TaxBuddy, which provides a user-friendly interface, expert validation, and auto-reconciliation with AIS/26AS.

Q4. Which ITR form should I use for reporting capital gains?

Use ITR-2 if you have capital gains from mutual funds, shares, or property and do not have business income. It allows detailed disclosures of each asset class and exemptions claimed under sections like 54 and 54F.

Q5. How do I claim exemption under Section 54?

To claim exemption under Section 54, report the capital gains from the sale of a residential property and provide details of the new property purchased or constructed. Ensure that investment is made within the allowed time frame and attach supporting documents when requested.

Q6. What documents should I keep for capital gains reporting?

Maintain sale and purchase deeds, cost of improvement bills, TDS certificates, Form 26AS, proof of reinvestment (for exemption claims), and indexation calculations. These are essential in case of tax scrutiny or for responding to Section 143(1) notices.

Q7. How can I avoid notices under Section 143(1)?

Avoid mismatches by accurately reporting sale values, applying the right exemption sections, and reconciling your ITR with the Annual Information Statement (AIS) and Form 26AS. Also, ensure proper use of indexation and correct ITR form selection.

Q8. Can TaxBuddy help with capital gains reporting?

Yes, TaxBuddy simplifies capital gains reporting through AI-enabled workflows and expert review. It handles asset-wise segregation, applies exemptions, verifies AIS data, and ensures correct ITR selection, significantly reducing the risk of tax notices.

Q9. Is it mandatory to report exempt capital gains?

Yes. Even if capital gains are exempt—such as reinvested gains under Section 54 or gains from agricultural land—they must still be reported in the ITR under the “Exempt Income” or “Capital Gains” schedule to maintain transparency.

Q10. What if the capital gain is not shown in AIS?

You must still report the gain. The AIS may have data gaps, especially for off-market transactions or delayed updates. If the AIS has incorrect entries, you can submit feedback or raise a correction request directly on the Income Tax portal.

Q11. Can capital losses be carried forward to future years?

Yes. Short-term capital losses (STCL) can be set off against both STCG and LTCG, while long-term capital losses (LTCL) can only be set off against LTCG. Unused losses can be carried forward for up to 8 assessment years, provided the return is filed before the due date.

Q12. What is the deadline for filing ITR with capital gains for FY 2024-25?

The due date for filing ITR for individuals (non-audit cases) is July 31, 2025. If the return involves complex capital gains, it’s advisable to begin early and consider expert-assisted filing via platforms like TaxBuddy to avoid last-minute errors or omissions.