How to Switch from ITR 1 to ITR 2 When You Have Capital Gains

Switching from ITR 1 to ITR 2 is essential for taxpayers who earn income from capital gains, as ITR 1 is not designed to accommodate detailed reporting of such income. While ITR 1 caters to individuals with income primarily from salary, a single house property, and other limited sources, it does not support comprehensive disclosures related to capital gains from assets like shares, mutual funds, or property sales. Capital gains require specific schedules and detailed information to calculate tax liability accurately, which only ITR 2 provides. Filing the correct ITR form is crucial to prevent errors, avoid notices from the Income Tax Department, and ensure smooth processing of the return. Taxpayers must also be aware of the necessary documents, such as capital gains statements, sale deeds, and tax certificates, to complete their filing accurately. Recent changes in tax laws and reporting thresholds make it even more important to stay updated. Platforms like TaxBuddy simplify this transition by offering an easy-to-use interface and expert guidance, helping taxpayers file ITR 2 accurately and on time, reducing the risk of mistakes and delays.

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Table of Contents

• Why Switch from ITR 1 to ITR 2 When You Have Capital Gains?

• Documents Required to Switch from ITR 1 to ITR 2

• Step-by-Step Process to File ITR 2 for Capital Gains

• Reporting Short-Term and Long-Term Capital Gains in ITR 2

• How to Validate and Submit Your ITR 2 Return

• Latest Updates on Capital Gains Reporting for AY 2025-26

• Common Mistakes to Avoid While Filing ITR 2

• How TaxBuddy Simplifies Switching from ITR 1 to ITR 2

• Conclusion

• Frequently Asked Questions (FAQs)

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Why Switch from ITR 1 to ITR 2 When You Have Capital Gains?

Understanding ITR 1 and Its Limitations

ITR 1, also known as Sahaj, is limited to individuals whose income comes from salary, one house property, and other sources excluding winnings from lotteries or racehorses. It allows only a small exemption for long-term capital gains up to ₹1.25 lakh under Section 112A without the option to carry forward losses. Therefore, if a taxpayer earns capital gains beyond this limit or from multiple sources, filing ITR 1 is not permissible.

The Scope of ITR 2

ITR 2 is designed to report multiple income streams, including detailed capital gains from sale of shares, mutual funds, property, and other assets. It supports transaction-wise reporting, disclosure of both short-term and long-term capital gains, and allows for the set-off and carry forward of capital losses. This is especially important for taxpayers with complex investment portfolios or those who have made several transactions during the year.

Compliance and Avoiding Notices

Filing ITR 2 ensures compliance with tax laws and proper reporting of capital gains, avoiding rejections or notices from the Income Tax Department. Using the wrong form can lead to your return being treated as defective, delays in processing, or even penalties if not rectified in time. Thus, understanding when to switch from ITR 1 to ITR 2 is crucial for accurate tax reporting and peace of mind.

Documents Required to Switch from ITR 1 to ITR 2

To switch and file ITR 2 correctly, taxpayers must gather essential documents. Here’s a checklist to ensure you have everything you need:

Identity and Tax Information

• PAN Card: Mandatory for all tax filings.

• Aadhaar Card: Required for e-verification and as a proof of identity.

Income and Tax Deduction Documents

• Form 16/16A: For reporting salary income and tax deducted at source (TDS) by employers or other deductors.

• Form 26AS/Annual Information Statement (AIS): Consolidated record of all TDS, TCS, and tax payments made during the year.

Capital Gains Documentation

• Capital Gains Statement: Provided by brokers or mutual fund registrars (such as CAMS or KFintech), this statement lists all transactions, including purchase and sale of shares, mutual funds, and other securities.

• Contract Notes: Issued by brokers for each buy/sell transaction in the stock market.

• Sale and Purchase Deeds: For property transactions, these legal documents record the transfer of ownership and are essential for calculating capital gains.

• Receipts for Improvement Costs: If you have incurred expenses to improve a property, keep all related receipts as these can be added to the cost of acquisition.

Other Supporting Documents

• TDS Certificates: For tax deducted on capital gains or other incomes.

• Tax Challans: Proof of advance tax or self-assessment tax paid.

• Bank Statements: Useful for cross-verifying dividend, interest, and sale proceeds.

• Notices or Communications from the Tax Department: If you have received any, keep them handy for reference.

Having these documents organized before you start the filing process will save time, reduce errors, and ensure you don’t miss any crucial details.

Step-by-Step Process to File ITR 2 for Capital Gains

Filing ITR 2 may seem daunting, but breaking it down into clear steps makes it manageable and ensures completeness.

1. Log in to the Income Tax Portal

Visit the Income Tax e-Filing portal and log in with your PAN, password, and captcha.

2. Start a New Return

Navigate to “e-File” > “Income Tax Returns” > “File Income Tax Return.” Select the relevant assessment year (e.g., AY 2025-26).

3. Choose the Correct Form and Filing Mode

Select “Online” as the filing mode and choose “ITR 2” as the form type. Confirm your residential status and proceed.

4. Enter Personal and Income Details

Fill in your personal information, including address, contact details, and bank account information for refunds.

5. Add Income Details

Input your salary, pension, house property income (if any), and income from other sources such as interest or dividends.

6. Fill in Schedule Capital Gains

• Navigate to “Schedule Capital Gains.”

• Report each asset sold during the year, specifying whether it is short-term or long-term.

• Enter purchase and sale dates, cost of acquisition, sale consideration, and any improvement costs.

• For shares and mutual funds, especially those acquired before January 31, 2018, provide transaction-wise details (ISIN, purchase date, sale date, cost, and sale value).

• For property, include details like address, date of purchase/sale, and expenses incurred.

7. Complete Other Relevant Schedules

• Deductions: Claim deductions under various sections (as applicable).

• Exempt Incomes: Report any exempt incomes such as agricultural income.

• Tax Payments: Enter details of advance tax, self-assessment tax, and TDS.

8. Validate the Return

Use the portal’s validation tool to check for missing fields, incorrect entries, and calculation mistakes. Correct any errors flagged.

9. Preview and Submit

Carefully preview the entire return to confirm all data is accurate. Submit the return online, which generates an acknowledgment receipt.

10. E-Verify the Return

E-verification is mandatory to complete the filing process. You can e-verify using Aadhaar OTP, net banking, bank account-based OTP, or by sending a signed ITR-V to the Central Processing Centre (CPC) within 30 days.

Reporting Short-Term and Long-Term Capital Gains in ITR 2

Short-Term Capital Gains (STCG)

• Definition: Gains from assets held for less than 36 months (or 12 months for listed equity shares and equity mutual funds).

• Tax Rate: STCG on listed equity shares and equity mutual funds is taxed at 15% under Section 111A.

• Reporting: Enter sale and purchase values, dates, and ISIN (if applicable) for each transaction. For other assets, report as per holding period and asset type.

Long-Term Capital Gains (LTCG)

• Definition: Gains from assets held for more than 36 months (or 12 months for listed equity shares and equity mutual funds).

• Tax Rate: LTCG on equity shares and mutual funds exceeding ₹1 lakh is taxed at 10% under Section 112A.

• Grandfathering Rule: For shares/mutual funds purchased before January 31, 2018, provide transaction-wise details to apply the grandfathering provisions for cost calculation.

• Reporting: For assets acquired before January 31, 2018, enter ISIN, purchase date, sale date, cost of acquisition, and sale value for each lot sold. For assets acquired after this date, consolidated reporting is allowed.

Importance of Accurate Reporting

Properly reporting these gains in ITR 2 is critical for correct tax calculation and compliance. Inaccurate or incomplete reporting can result in notices, penalties, or delays in processing.

How to Validate and Submit Your ITR 2 Return

Validation Process

After filling all required schedules and details, use the portal’s validation tool to check for errors or missing fields. Any discrepancies will be flagged for correction.

Preview and Submission

Once the form passes validation, preview the entire return carefully to confirm all data is accurate. Submit the return online, which will generate an acknowledgment receipt.

E-Verification

The return must be e-verified within 30 days to complete the filing process. E-verification can be done via Aadhaar OTP, net banking, or by physically sending a signed ITR-V to the Central Processing Centre (CPC). Failing to e-verify leads to the return being treated as invalid.

Latest Updates on Capital Gains Reporting for AY 2025-26

Key Regulatory Changes

• Splitting Capital Gains: Recent changes require splitting capital gains between periods before and after July 23, 2024, due to amendments in tax rules.

• Buyback Shares: Capital loss on buyback shares is now allowed only if the corresponding dividend income is declared as “Income from Other Sources.”

• Asset Reporting Threshold: The threshold for reporting assets and liabilities has increased to ₹1 crore, affecting disclosures in the tax return.

• Enhanced TDS Reporting: Now requires specifying section codes in Schedule-TDS for improved transparency.

Why These Updates Matter

These updates aim to improve transparency and compliance. Staying aware of such changes ensures accurate filing and prevents notices or penalties.

Common Mistakes to Avoid While Filing ITR 2

Filing ITR 1 Despite Having Capital Gains Exceeding Allowed Limits One common error is filing ITR 1 when the taxpayer has capital gains income beyond the small exemption allowed under Section 112A (₹1.25 lakh). ITR 1 is intended for simple income sources like salary and one house property and does not support detailed reporting of capital gains. Using ITR 1 in such cases can lead to rejection of the return or notices from the tax department. To comply, taxpayers must switch to ITR 2, which accommodates all capital gains income comprehensively. Filing the correct form avoids unnecessary complications and ensures accurate tax calculation.

Missing Transaction-Wise Details for Long-Term Capital Gains on Shares Acquired Before January 31, 2018 For shares and equity mutual funds purchased before January 31, 2018, taxpayers are required to report each transaction separately in ITR 2. This includes providing details such as ISIN numbers, purchase and sale dates, and cost of acquisition for every lot sold. Omitting these details or providing aggregated figures without breakup can cause mismatches during processing and trigger notices for incomplete disclosure. Careful and accurate transaction-wise reporting is essential to avoid penalties and to correctly calculate the benefit of grandfathering provisions under Section 112A.

Not Validating the Return Leads to Avoidable Errors The income tax e-filing portal offers a validation tool that checks the return form for missing fields, incorrect entries, and calculation mistakes. Skipping this validation step can result in filing returns with errors that delay processing or lead to rejections. Taxpayers should always run the validation tool and correct all flagged issues before submitting the return. Proper validation ensures the information is complete and compliant, reducing the risk of follow-up notices or additional queries from the tax department.

Delayed or Missed E-Verification Causes the Return to Be Invalidated Filing the return is only the first step; e-verification is mandatory to complete the process. If the return is not e-verified within 30 days of filing, it is considered invalid, and the filing is treated as if it never happened. This requires re-filing the return and could result in penalties or loss of refund claims. Common e-verification methods include Aadhaar OTP, net banking, or physically sending a signed ITR-V acknowledgment to the CPC. Timely e-verification safeguards the validity of the return and speeds up refund processing.

Incorrect or Incomplete Reporting of Capital Gains and Related Expenses Capital gains calculations depend not only on sale proceeds but also on cost of acquisition, improvement costs, and allowable deductions such as indexation benefits. Failure to include these details or incorrectly reporting expenses can inflate the taxable capital gain, resulting in higher tax liability. Conversely, under-reporting gains can attract scrutiny or penalties. Thoroughly including all relevant costs, using correct acquisition dates, and reporting gains under the right sections ensures accurate tax liability and compliance.

Ignoring Recent Updates Leading to Incorrect Disclosures Tax laws and reporting requirements for capital gains frequently update. For example, from AY 2025-26, capital gains need to be split between periods before and after July 23, 2024, and thresholds for asset reporting have changed. Ignoring such updates can lead to incomplete or incorrect disclosures in ITR 2, inviting notices or reassessments. Staying informed through official sources or using platforms like TaxBuddy, which integrate the latest regulatory changes, helps taxpayers file accurately and avoid mistakes.

How TaxBuddy Simplifies Switching from ITR 1 to ITR 2

TaxBuddy provides an intuitive platform to easily switch from ITR 1 to ITR 2 with step-by-step guidance. It allows automatic import of capital gains data from brokers, reducing manual entry and errors. The platform validates all entries in real-time, flagging inconsistencies and missing information before submission. TaxBuddy also offers both self-filing and expert-assisted plans for users who want additional help. Its mobile app streamlines the filing process on the go, offering a seamless experience from data upload to e-verification. With TaxBuddy, taxpayers can file accurate returns confidently and on time.

Conclusion

Switching from ITR 1 to ITR 2 is essential for those with capital gains to ensure proper tax reporting and compliance. Following the correct procedure and being aware of the required documents can simplify the transition. 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.

Frequently asked Question (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 and expert-assisted plans. Taxpayers comfortable with filing on their own can use the self-filing option with intuitive guidance through the platform. For those who prefer expert help, TaxBuddy’s team of tax professionals is available to assist in accurate and timely filing. This flexibility ensures users of all experience levels can file their ITR with confidence.

Q2. Which is the best site to file ITR? The best site to file ITR depends on user needs, but TaxBuddy stands out for its secure, user-friendly interface and comprehensive support. It is an authorized E-Return Intermediary (ERI) by the Government of India and trusted by over a million users. TaxBuddy simplifies tax filing with features like auto-import of data, error validation, and expert assistance, making it one of the top platforms for online tax filing.

Q3. Where to file an income tax return? Income tax returns can be filed directly on the official government portal at incometax.gov.in or through authorized platforms like TaxBuddy. TaxBuddy offers a safe and streamlined filing experience, with additional benefits such as stepwise guidance, easy upload of documents, and mobile app convenience for filing anywhere.

Q4. Can I file ITR 1 if I have capital gains? ITR 1 cannot be filed if the taxpayer has capital gains beyond limited exemptions. Only long-term capital gains under Section 112A up to ₹1.25 lakh with no carry-forward losses are allowed in ITR 1. If capital gains exceed this limit or come from multiple assets, filing ITR 2 is mandatory to report detailed income correctly.

Q5. What documents are needed for reporting capital gains? Documents required include capital gains statements or contract notes from brokers, sale and purchase deeds for properties, Form 16/16A for salary and TDS, Form 26AS or Annual Information Statement for tax payments, PAN and Aadhaar cards, bank account details, and proof of investments. Having these ready ensures accurate reporting of gains and tax deductions.

Q6. Is it mandatory to report each capital gain transaction separately? For long-term capital gains on shares and mutual funds purchased before January 31, 2018, transaction-wise reporting is mandatory in ITR 2. For other assets or transactions, consolidated reporting is allowed, simplifying the process while maintaining compliance.

Q7. What is the due date for filing ITR 2? For the Assessment Year 2025-26 (Financial Year 2024-25), the due date for filing ITR 2 is July 31, 2025. Filing by this date avoids penalties and interest and ensures timely processing of returns.

Q8. How do I e-verify my ITR 2 return? ITR 2 can be e-verified using several methods: Aadhaar OTP, net banking, bank account-based OTP, or by sending a signed physical copy of the ITR-V acknowledgement to the Central Processing Centre (CPC) within 30 days of filing. E-verification finalises the filing and triggers processing.

Q9. What if I filed ITR 1 by mistake but have capital gains income? If ITR 1 was filed mistakenly despite having capital gains income, filing a revised return using ITR 2 is necessary. The revised return corrects the earlier filing and reports capital gains correctly. Filing the revised return before the deadline helps avoid penalties.

Q10. Are there any penalties for filing the wrong ITR form? Filing the wrong ITR form may lead to processing delays, notices from the Income Tax Department, and potential penalties if corrections are not made timely. To avoid this, it is important to choose the correct ITR form as per income sources and revise the return promptly if an error occurs.

Q11. Can TaxBuddy help import capital gains data from brokers? Yes, TaxBuddy’s platform supports automatic import of capital gains data from registered brokers and registrars. This feature reduces manual errors, saves time, and ensures accurate reporting of transactions and gains in the ITR form.

Q12. How long does the processing of ITR 2 take after submission? Processing of ITR 2 by the Central Processing Centre (CPC) generally takes between 1 to 10 months, depending on the complexity of the return and verification status. Early filing and proper verification help speed up the process.