How to Report Equity Capital Gains Accurately in ITR-2 for AY 2025-26

For taxpayers dealing with investments in the stock market or equity mutual funds, understanding how to report equity capital gains in the Income Tax Return (ITR) is essential. Capital gains from the sale of shares or equity mutual funds are taxed under specific provisions of the Income Tax Act, and they are categorized based on the holding period of the asset. The Income Tax Department requires taxpayers to report these gains in their tax returns to ensure that taxes are paid accurately. Let us explore the concept of equity capital gains, the key updates for the Assessment Year (AY) 2025-26, and provide a detailed step-by-step guide on how to report these gains using ITR-2.

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Table of Contents

• What are Equity Capital Gains?

• Key Updates for AY 2025-26

• Step-by-Step Guide to Report Equity Capital Gains in ITR-2

• Conclusion

• FAQs

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What are Equity Capital Gains?

Equity capital gains refer to the profits made from the sale of shares, stocks, or equity mutual funds. When an individual or entity sells their investments in equity and makes a profit, that profit is considered a capital gain. The taxation on these gains depends on how long the asset was held before being sold.

There are two types of equity capital gains:

• Short-Term Capital Gains (STCG): If the asset is sold within one year of purchase (for listed shares) or three years (for mutual funds), the gains are considered short-term. These gains are taxed at a rate of 15%, irrespective of the income bracket.
  

• Long-Term Capital Gains (LTCG): If the asset is held for more than one year (for listed shares) or three years (for mutual funds), the gains are long-term. Long-term capital gains exceeding ₹1 lakh are subject to a tax rate of 10% without the benefit of indexation.

Understanding these distinctions is crucial because it directly impacts the amount of tax payable on equity investments. It's important to keep track of the holding period and the amount of gains realized in each financial year.

Key Updates for AY 2025-26

For the Assessment Year (AY) 2025-26, the tax treatment of equity capital gains remains largely the same as the previous year. However, there are some important updates and clarifications that taxpayers need to be aware of when filing their returns:

• Exemption on LTCG: For long-term capital gains (LTCG) exceeding ₹1 lakh, taxpayers are still required to pay a tax rate of 10%. This threshold of ₹1 lakh remains applicable for AY 2025-26.
  

• Tax Filing Changes for Equity Transactions: The Income Tax Department has made some minor adjustments in the way equity-related transactions are reported in ITR forms. The forms now include more detailed fields to capture information about securities transaction tax (STT) and other related income.
  

• Introduction of New Forms for Reporting: For AY 2025-26, the ITR forms have been updated to make it easier for taxpayers to report their capital gains. These updates aim to simplify the process of disclosing equity transactions and help reduce errors while filing.

These updates emphasize the need for accurate reporting, especially regarding the exemptions and tax rates applicable to capital gains. Understanding these key changes is crucial for taxpayers to ensure they are compliant with the latest tax laws and maximize their tax savings.

Step-by-Step Guide to Report Equity Capital Gains in ITR-2

Filing the ITR-2 form for equity capital gains can be a straightforward process if you follow the correct steps. Here’s a step-by-step guide to report equity capital gains in ITR-2 for AY 2025-26:

• Download the Correct Form: To file your ITR-2, visit the official Income Tax Department website and download the ITR-2 form. This form is specifically designed for taxpayers who have income from sources such as capital gains, other than business or profession.
  

• Fill in Personal Details: Enter your basic personal information, including your name, PAN, address, and contact details. Make sure that your PAN is correctly linked to your bank account and Aadhaar number.
  

• Declare Capital Gains:
  

• Short-Term Capital Gains (STCG): In the ITR-2, navigate to the section on “Income from Capital Gains” and select “Short-Term Capital Gains (STCG)”. Report the gains from the sale of equity shares or mutual funds that were held for less than the applicable time.
  

• Long-Term Capital Gains (LTCG): Similarly, report long-term capital gains in the designated section. Ensure that you declare gains from the sale of listed shares and mutual funds that were held for more than the specified period.
  

• STT Paid: If you’ve paid Securities Transaction Tax (STT) on your equity transactions, mention the STT amount in the appropriate section, as it’s crucial for determining whether the gains are taxable.
  

• Provide Details of Transactions: You will need to provide the details of each transaction, including the date of acquisition, date of sale, sale proceeds, purchase cost, and the STT paid.
  

• Calculate Tax Payable: After entering all details, the ITR-2 form will calculate your total capital gains and the tax payable on them. This will include both STCG and LTCG as per the respective tax rates.
  

• Verify and Submit: Once you’ve filled in all the necessary details, carefully verify the information to ensure it’s accurate. After verification, submit the form online and complete the e-verification process through Aadhaar OTP, net banking, or other available methods.

Conclusion

Reporting equity capital gains in the Income Tax Return is crucial for compliance with tax laws. With the updates for AY 2025-26, it is important to carefully consider short-term and long-term capital gains, as well as other factors such as STT (Securities Transaction Tax). By following the steps outlined above, taxpayers can ensure they file their returns correctly and avoid potential errors or penalties. If you're uncertain or need assistance, platforms like TaxBuddy can simplify the process by providing expert guidance and ensuring that your return is accurate. With proper reporting, you can also explore opportunities to minimize your tax liabilities and make the most of tax-saving provisions. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: What is the difference between short-term and long-term capital gains? Short-term capital gains (STCG) refer to the profit earned from the sale of assets held for a short period. For equity shares and equity mutual funds, if the asset is sold within one year of purchase, it is considered short-term. Long-term capital gains (LTCG), on the other hand, arise from assets that have been held for more than one year. The key difference lies in taxation. Short-term capital gains from equity assets are taxed at 15%, while long-term capital gains exceeding ₹1 lakh are taxed at 10% without the benefit of indexation. This distinction is important for tax planning, as long-term gains often come with a more favorable tax treatment.

Q2: How do I calculate the holding period for my equity investments? The holding period for equity investments is the time between the acquisition date (when you buy the asset) and the sale date (when you sell it). For listed shares and equity mutual funds, if the asset is sold within one year of purchase, it is considered a short-term investment. If the asset is held for more than one year, it is classified as long-term. This calculation helps determine whether the gains are short-term or long-term, which in turn affects how they are taxed.

Q3: Can I claim deductions for losses in capital gains? Yes, you can claim deductions for capital losses. If you incur losses from the sale of equity assets, you can offset these losses against your capital gains. Short-term capital losses can be set off against short-term capital gains, and long-term capital losses can be used to offset long-term capital gains. If your losses exceed your gains, you can carry forward the losses to future years and use them to offset capital gains in those years. This helps reduce your taxable income in subsequent years.

Q4: Are all equity transactions taxable? Yes, all equity transactions are subject to taxation. This includes the sale of listed shares and equity mutual funds. The tax treatment depends on the holding period of the asset. If the asset is sold within one year (for equity shares) or three years (for mutual funds), the gains are considered short-term and taxed at 15% for equity shares and 15% or 10% for mutual funds, depending on the type of mutual fund. If the asset is sold after the holding period of one or three years, the gains are considered long-term and taxed at a 10% rate on gains exceeding ₹1 lakh.

Q5: Do I need to report STT paid on equity transactions? Yes, the Securities Transaction Tax (STT) paid on equity transactions must be reported in your Income Tax Return (ITR). STT is applicable on the sale of listed shares and is deducted at the time of the transaction. While STT is not directly charged as a separate tax, it plays a critical role in the calculation of capital gains. STT paid is used to determine whether the gains from the sale of equity assets are subject to taxation at the short-term or long-term rate and can influence your overall tax liability.

Q6: How do I report capital gains on my ITR? Capital gains should be reported in the capital gains schedule of your ITR. For each transaction, you must specify details like the sale price, purchase price, date of acquisition, and date of sale. For long-term assets, you can also claim indexation benefits to adjust the cost of acquisition for inflation. After entering the necessary details, the system will calculate the short-term or long-term gains and apply the relevant tax rates. If you have incurred any capital losses, they should be reported as well, and these can be set off against gains.

Q7: What is indexation, and how does it apply to capital gains? Indexation is a process that adjusts the purchase price of an asset for inflation when calculating long-term capital gains. This adjustment reduces the taxable gain by accounting for inflation, making it more favorable for taxpayers. The Cost Inflation Index (CII) is used to calculate this adjustment. For long-term capital assets, the cost of acquisition is adjusted using the CII, and the resultant amount is considered when calculating taxable gains. This can significantly reduce the taxable amount, as inflation increases the value of the asset over time.

Q8: Can I carry forward capital losses to offset future capital gains? Yes, if you have incurred capital losses in a particular financial year, you can carry forward those losses for up to 8 years. These losses can be set off against future capital gains, reducing the taxable amount. Short-term capital losses can be set off against short-term gains, and long-term capital losses can be offset against long-term gains. If the losses cannot be fully set off in the current year, they can be carried forward to offset gains in future years, providing you with an opportunity to reduce your tax liability in subsequent years.

Q9: What is the tax treatment of mutual funds? The tax treatment of mutual funds depends on the type of fund and the holding period. Equity mutual funds are taxed at 15% for short-term gains (if held for less than 1 year) and 10% for long-term gains (if held for more than 1 year) over ₹1 lakh. Debt mutual funds, on the other hand, are taxed at 30% for short-term gains (if held for less than 3 years) and 20% for long-term gains (if held for more than 3 years) with indexation benefits. The tax rates are applied based on whether the fund is classified as equity or debt, and depending on the holding period.

Q10: How does the new tax regime affect capital gains? Under the new tax regime, there are no deductions or exemptions available, including those related to capital gains. This means that while long-term capital gains above ₹1 lakh will still be taxed at 10%, and short-term capital gains will still be taxed at 15% under both tax regimes, the absence of deductions in the new regime makes it simpler but potentially less tax-advantageous for those who rely on exemptions. Taxpayers who are primarily interested in capital gains may find the old tax regime more beneficial because it allows for deductions, including exemptions for long-term capital gains.

Q11: What documents do I need to keep for capital gains tax filing? To file taxes related to capital gains, you should keep a record of documents such as purchase invoices, sale receipts, brokerage statements, bank statements (showing the payment for purchases and receipts from sales), and STT certificates. If you claim indexation, you must retain documents showing the CII values for each year of the asset’s holding period. For mutual funds, the purchase and sale statements issued by the mutual fund house should be retained, as they will help calculate your capital gains and ensure accurate reporting in your ITR.

Q12: How are real estate capital gains taxed? Real estate capital gains are treated similarly to other long-term and short-term capital assets. If the property is sold within 2 years of acquisition, the profit is considered short-term and is taxed at 30% (for individuals). If the property is sold after 2 years, the profit is long-term, and the gains are taxed at 20% with the benefit of indexation. Additionally, long-term gains from real estate sales may qualify for exemptions under Section 54 if the proceeds are reinvested in another property, reducing or eliminating the tax liability on those gains.