Long-Term vs Short-Term Capital Gains: Reporting Rules in ITR

Capital gains are a crucial aspect of income tax filings, as they represent profits made from the sale or transfer of capital assets. Understanding how capital gains are taxed, their types, and how to report them in Income Tax Returns (ITR) is essential for individuals and businesses. For the Financial Year 2024-25 (Assessment Year 2025-26), there are specific provisions regarding capital gains taxation, including the applicable rates, exemptions, and the process for reporting them in your ITR forms. Let us understand the types of capital gains, the tax rates that apply, exemptions available, and how capital gains should be reported in the ITR forms. We will also discuss how to set off capital losses and carry them forward for future use.

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Table of Contents:

• What Are Capital Gains and Their Types?

• Latest Tax Rates and Exemptions (AY 2025–26)

• Reporting Rules in ITR Forms (AY 2025–26)

• Set-Off and Carry Forward of Capital Losses

• Conclusion

• FAQs

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What Are Capital Gains and Their Types?

Capital gains refer to the profit earned from the sale or transfer of a capital asset such as real estate, stocks, mutual funds, or business assets. The taxation on capital gains depends on various factors like the holding period of the asset, the type of asset, and the nature of the transaction.

There are two primary types of capital gains:

• Short-Term Capital Gains (STCG): Short-term capital gains arise when a capital asset is sold or transferred within a short period of time. For assets like equity shares and equity-oriented mutual funds, the holding period for STCG is now 12 months or less. If the asset is sold within this period, the profit is classified as short-term and is taxed at a rate of 20% (effective from July 23, 2024), an increase from the earlier 15% rate. For other assets, including debt mutual funds and real estate, the short-term holding period is generally 24 months or less, with STCG taxed at the individual’s applicable slab rates.
  

• Long-Term Capital Gains (LTCG): Long-term capital gains refer to the profit earned from the sale of assets held for more than the specified holding period. For example, shares or mutual funds held for more than 12 months are considered long-term assets. LTCG on equity investments exceeding ₹1.25 lakh is taxed at 12.5%, without the benefit of indexation. For other assets held beyond 24 months, the gains are taxed as long-term capital gains under the existing rules, often with indexation benefits. These amendments aim to streamline holding periods and revise tax rates, encouraging long-term investment while aligning tax rates more closely across different asset classes.

Latest Tax Rates and Exemptions (AY 2025–26)

The tax rates for capital gains in FY 2024-25 (Assessment Year 2025-26) depend on the type of asset and the holding period.

• Short-Term Capital Gains Tax Rates: For listed equity shares and equity-oriented mutual funds, short-term capital gains (STCG) are now taxed at 20%, effective for gains arising on or after July 23, 2024, replacing the earlier 15% rate. This rate applies when Securities Transaction Tax (STT) is paid. For other assets such as unlisted shares, debt mutual funds, and real estate, STCG is taxed as per the individual’s applicable income tax slab rates.
  

• Long-Term Capital Gains Tax Rates: Long-term capital gains (LTCG) on equity shares and equity mutual funds held for more than 12 months are taxed at a uniform rate of 12.5% on gains exceeding ₹1.25 lakh per year, without any indexation benefit. This replaced the earlier 10% rate and increased exemption limit from ₹1 lakh. For other long-term assets, including real estate and unlisted equity shares held beyond 24 months, LTCG is generally taxed at 12.5% without indexation if acquired after July 23, 2024. However, if the asset was acquired before this date, taxpayers may choose to pay 20% LTCG tax with indexation benefit or 12.5% without indexation. This uniform 12.5% rate simplifies the tax structure across asset classes and removes indexation benefits for most assets.

These changes were introduced by the Union Budget 2024 and have been retained in Budget 2025, aiming to streamline capital gains taxation and encourage transparency, while aligning tax rates across different kinds of assets

• Exemptions:
  

• Under Section 54, individuals can avail of an exemption on LTCG from the sale of residential property if the proceeds are reinvested in a new residential property.
  

• Section 54EC offers an exemption for long-term capital gains from the sale of property if the gains are invested in specified bonds like those issued by NHAI or REC within six months of the sale.
  

• Section 54F allows a similar exemption for individuals who sell any long-term asset (other than a residential house) and use the proceeds to buy a residential property.

These exemptions and tax rates play a key role in determining how much capital gains tax you will owe, making it important to understand them thoroughly when planning your investments.

Reporting Rules in ITR Forms (AY 2025–26)

Reporting capital gains in the Income Tax Return (ITR) forms is mandatory for taxpayers who have earned profits through the sale or transfer of capital assets. The specific ITR forms depend on the type of taxpayer and income sources.

• For Individuals and Hindu Undivided Families (HUFs): The ITR-2 form is generally used for individuals and HUFs who have earned income through capital gains, whether short-term or long-term. This form requires detailed reporting of the sale of assets such as real estate, stocks, mutual funds, and other securities.
  

• For Businesses: Businesses that have earned capital gains as part of their operational activities must file ITR-3. The form requires businesses to report gains from the sale of capital assets, which are taxed under business income or capital gains depending on the asset type.

When filling out the ITR forms, taxpayers must provide:

• The nature of the asset sold (e.g., property, shares, mutual funds).

• The date of purchase and sale, to determine whether the gain is short-term or long-term.

• The sale consideration, cost of acquisition, and any exemptions claimed under sections like 54, 54F, or 54EC.

• The amount of capital gains, after applying the relevant tax rate.

Set-Off and Carry Forward of Capital Losses

In case you incur capital losses from the sale of an asset, these losses can be set off against any capital gains you have made in the same financial year, which can reduce your tax liability. If your total capital losses exceed the capital gains, the losses can be carried forward to future years.

• Short-Term Capital Losses: These losses can be set off against both short-term and long-term capital gains in the same year. If not fully utilized, they can be carried forward for up to 8 years.

• Long-Term Capital Losses: Long-term capital losses can only be set off against long-term capital gains in the same year. Any unutilized long-term capital losses can be carried forward for up to 8 years.

This provision ensures that taxpayers are not unduly penalized for losses incurred in the sale of capital assets and can use them strategically to reduce future tax liabilities.

Conclusion

Capital gains play a vital role in income tax calculations, and understanding how they are taxed, reported, and offset is crucial for taxpayers. The latest tax rates for short-term and long-term capital gains, along with exemptions, offer taxpayers opportunities to minimize their tax burden while ensuring compliance with tax laws. Reporting capital gains accurately in your ITR form, taking advantage of exemptions, and using strategies like setting off and carrying forward capital losses can significantly impact your tax obligations. Proper knowledge of these provisions helps you make informed investment decisions and optimize your tax filings.

For a streamlined filing process and expert assistance, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: What are the different types of capital gains?

Capital gains are classified into two types: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The classification depends on the holding period of the asset before it is sold:

• STCG: This applies to assets sold within a short holding period. For example, if you sell an equity share within 24 months of purchase, the gain is considered short-term.
  

• LTCG: When an asset is held for a longer period before being sold, the gain is classified as long-term. For instance, selling real estate or shares after holding them for more than 24 months generally results in LTCG.

The tax treatment of these gains varies based on the type of asset and the holding period.

Q2: What tax rates apply to capital gains for FY 2024-25?

For the Financial Year 2024-25, capital gains tax is as follows:

• STCG on equity shares and mutual funds: Taxed at 20% if sold within 12 months, provided Securities Transaction Tax (STT) is paid.
  

• LTCG on equity shares and mutual funds: Taxed at 12.5% on gains exceeding ₹1.25 lakh per year without the benefit of indexation.
  

• STCG on real estate: Taxed at the individual’s applicable income tax slab rate if sold within 24 months.

• LTCG on real estate: Taxed at 12.5% without indexation if acquired on or after July 23, 2024; for assets acquired earlier, taxpayers can opt for 20% with indexation or 12.5% without indexation.

The tax rates may vary for other assets, and tax exemptions may apply under certain sections.

Q3: How do I report capital gains in my ITR?

Capital gains are reported in the Income Tax Return (ITR) under ITR-2 for individuals or Hindu Undivided Families (HUFs), and ITR-3 for businesses. You will need to fill out the capital gains section with details such as:

• The asset type (property, shares, mutual funds, etc.).

• Date of acquisition and sale of the asset.

• Sale consideration (selling price).

• Cost of acquisition and any improvement (if applicable).

• Any exemptions or deductions you are claiming.

Proper documentation and accurate reporting are necessary to avoid penalties or scrutiny.

Q4: Can I offset capital losses?

Yes, capital losses can be used to offset capital gains. Here’s how it works:

• Short-Term Capital Losses (STCL): Can be set off against both STCG and LTCG.

• Long-Term Capital Losses (LTCL): Can only be set off against LTCG.

If you don’t use the full capital loss in the current year, you can carry it forward for up to 8 years to offset against future capital gains. Ensure you report the losses in your ITR to carry them forward.

Q5: Are there any exemptions on capital gains?

Yes, there are several exemptions available under the Income Tax Act, allowing you to reduce or eliminate capital gains tax if specific conditions are met. Some common exemptions include:

• Section 54: Available when you sell a residential property and reinvest the proceeds into another residential property.

• Section 54EC: Available for reinvesting the capital gains into specified bonds like those issued by the National Highways Authority of India (NHAI).

• Section 54F: Available when you sell a long-term capital asset (other than a residential property) and reinvest the proceeds in a residential property.

The exemptions depend on factors such as the type of asset and how the proceeds are reinvested.

Q6: How long can I carry forward capital losses?

You can carry forward capital losses for up to 8 years. Any unused losses from the current financial year can be offset against capital gains in the following years. However, you must report the losses in your ITR each year to carry them forward.

Q7: Can I claim capital gains tax exemptions for property sales?

Yes, exemptions under Section 54 are available when you sell a residential property and reinvest the proceeds in another residential property within a specific period. Similar exemptions are available for other asset classes under different sections, such as Section 54F for the sale of assets other than a residential property.

These exemptions help reduce your taxable capital gains and, in some cases, eliminate them entirely.

Q8: What is the tax on long-term capital gains from the sale of property?

For property held for more than 24 months, LTCG is generally classified as long-term. According to the current provisions, for properties acquired on or after July 23, 2024, LTCG is taxed at a uniform rate of 12.5% without indexation benefits. This means the cost of acquisition is not adjusted for inflation when calculating gains. However, for properties acquired before July 23, 2024, taxpayers have the option to pay LTCG tax at the lower of 12.5% without indexation or 20% with indexation, allowing them to adjust the purchase price for inflation which can reduce the taxable gain. This flexibility helps long-term property owners optimize tax liability depending on their acquisition date and financial situation.

Q9: How do I calculate capital gains tax on mutual funds?

The taxation of capital gains on mutual funds depends on the holding period and type of fund:

• Short-Term Capital Gains (STCG): If mutual fund units (equity-oriented) are sold within 12 months, the gains are classified as short-term and taxed at 20% (effective July 23, 2024) if Securities Transaction Tax (STT) is paid. For non-equity mutual funds (debt funds), the short-term period is 36 months and STCG is taxed as per the individual’s slab rate.

• Long-Term Capital Gains (LTCG): For equity-oriented mutual funds held for more than 12 months, LTCG exceeding ₹1.25 lakh in a financial year is taxed at 12.5% without indexation. For non-equity funds held for more than 36 months, LTCG is taxed at 12.5% without indexation as well. The earlier 10% LTCG rate with a ₹1 lakh exemption for equity mutual funds has been replaced by this uniform 12.5% rate with an increased exemption limit.

If your total LTCG exceeds ₹1.25 lakh, the tax rate is applied only to gains above this threshold.

Q10: What happens if I sell a property and reinvest in another?

If you sell a residential property and reinvest the proceeds in another residential property, you can claim an exemption under Section 54. This exemption allows you to avoid paying tax on the capital gains if the proceeds from the sale are used to purchase or construct another residential property within a specified period.

This can significantly reduce your tax liability if you meet the conditions set by the tax department.

Q11: How does indexation affect long-term capital gains?

Indexation is the process of adjusting the purchase price of an asset to account for inflation over time. By increasing the cost of acquisition, indexation reduces the long-term capital gains, which lowers the tax liability. For example, if you bought a property for ₹10 lakh 10 years ago and sell it for ₹30 lakh, the indexed cost will be higher, thus reducing your taxable gain.

Indexation is available for assets like real estate and debt mutual funds but not for assets like gold and equity shares.

Q12: Can I claim capital losses on the sale of shares?

Yes, capital losses from the sale of shares, whether short-term or long-term, can be set off against capital gains.

• Short-Term Capital Losses (STCL) can be set off against both short-term and long-term gains.

• Long-Term Capital Losses (LTCL) can only be set off against long-term gains.

If you have no gains in the current year to offset the losses, you can carry forward these losses for up to 8 years and use them to reduce future capital gains. Ensure to report these losses in your ITR for them to be carried forward.