ITR filing 2026: Tax-free LTCG up to ₹1.25 lakh? Do you still need to report it in your ITR?

With the July 31, 2026, deadline for filing Income Tax Returns (ITRs) for Assessment Year (AY) 2026-27 fast approaching, taxpayers earning long-term capital gains (LTCG) from listed shares, equity mutual funds and business trusts should not assume that tax-free gains can be skipped while filing their returns. Although LTCG of up to ₹1.25 lakh under Section 112A is exempt from income tax, experts say such gains must still be disclosed in the ITR to remain compliant with tax laws.

Salaried employees, pensioners, students and other taxpayers who are not required to undergo a tax audit must generally file their ITR by July 31. However, individuals whose total income is below the applicable basic exemption limit and who do not have income taxable at special rates or specified high-value financial transactions may not be required to file a return.

Tax-exempt LTCG

The Income Tax Department has also allowed eligible taxpayers to report tax-exempt LTCG through ITR-1 (Sahaj), provided the gains are within the ₹1.25 lakh exemption limit, there are no brought-forward or carry-forward capital losses and the taxpayer does not have complex capital gain transactions. Taxpayers with capital losses, foreign assets or income, multiple capital gains or other ineligible income sources will have to file ITR-2 instead.

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CA (Dr.) Suresh Surana said taxpayers should not confuse the ₹1.25 lakh exemption threshold with the obligation to file an income tax return. He explained that while eligible long-term capital gains may not attract tax, the requirement to file an ITR is governed by separate provisions under the Income Tax Act. The deciding factor is whether the taxpayer satisfies the prescribed return-filing conditions, such as crossing the applicable basic exemption limit or meeting any mandatory filing criteria, and not merely whether tax is payable on the capital gains.

"The ₹1.25 lakh LTCG exemption threshold should not be confused with the requirement to file an Income-tax Return. The key test is not whether tax is payable on the capital gains, but whether the taxpayer meets the prescribed return-filing criteria," said CA (Dr.) Suresh Surana.

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Disclosing LTCG gains

Surana further pointed out that even where LTCG falls entirely within the tax-exempt limit, taxpayers should disclose the gains in their returns. Doing so ensures consistency with the Annual Information Statement (AIS) and Form 26AS, creates a proper compliance record and reduces the chances of receiving future notices or clarification requests from the Income Tax Department. At the same time, taxpayers whose income remains below the basic exemption limit and who do not satisfy any mandatory filing conditions may not be required to file a return.

"Even where LTCG is not taxable because it falls within the ₹1.25 lakh threshold, the gains are not exempt from disclosure. Such transactions should be appropriately reported in the ITR to ensure consistency with AIS and Form 26AS and minimise the risk of future queries from the tax authorities," Surana added.

₹1.25 lakh threshold

Siddharth Maurya, Founder and Managing Director of Vibhavangal Anukulakara Pvt. Ltd., said many taxpayers wrongly believe that tax-free LTCG automatically removes the need to file an ITR. According to him, the ₹1.25 lakh threshold relates only to tax exemption on eligible equity investments and does not override the return-filing rules. He added that taxpayers should still report such gains, particularly if they have high-value transactions, foreign assets, capital losses they intend to carry forward or refund claims.

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Choosing the ITR form

The experts also cautioned taxpayers against choosing the wrong ITR form. Surana said ITR-1 is available only to eligible resident individuals with income up to ₹50 lakh who satisfy all prescribed conditions. Taxpayers with capital losses, gains from assets such as real estate or gold, foreign assets or income, agricultural income above ₹5,000, directorships, unlisted shares, ESOP-related disclosures or total income above ₹50 lakh must opt for ITR-2. Maurya noted that a common mistake is selecting ITR-1 simply because the LTCG appears tax-exempt, without checking the nature of investments or other disclosure requirements.

"A common misstep is picking ITR-1 just because the LTCG looks tax-exempt, without verifying what the investments really are and without making the necessary disclosures," Maurya said.

Criteria	ITR-1 (Sahaj)	ITR-2
Who can file?	Resident individuals with income up to ₹50 lakh	Individuals not eligible for ITR-1
LTCG up to ₹1.25 lakh under Section 112A	✔ Allowed	✔ Allowed
Capital losses to carry forward	✘ Not allowed	✔ Allowed
Capital gains from property, gold, etc.	✘ Not allowed	✔ Allowed
Foreign assets or foreign income	✘ Not allowed	✔ Allowed
Unlisted shares/directorship	✘ Not allowed	✔ Allowed
ESOP disclosures	✘ Not allowed	✔ Allowed
Total income above ₹50 lakh	✘ Not allowed	✔ Allowed

The experts warned that failing to report tax-exempt LTCG may not immediately create a tax liability, but it can result in mismatches with AIS, Form 26AS, broker statements and other third-party reporting. Such discrepancies may trigger automated communications, scrutiny notices or requests for clarification from the Income Tax Department. Proper disclosure, they said, helps maintain a clean financial trail and can prevent avoidable compliance issues during future assessments. "If tax-exempt LTCG is not reported despite being reflected in AIS or Form 26AS, the taxpayer may receive mismatch-based communications, e-verification queries, notices or clarification requests from the Income Tax Department," Surana said.

Common mistake	Why it's a problem
Not reporting tax-free LTCG	Can trigger AIS/Form 26AS mismatches and notices
Assuming no tax means no ITR	Filing requirement depends on income and other conditions
Choosing ITR-1 without checking eligibility	May result in filing an incorrect return
Ignoring capital losses	Capital losses generally require ITR-2
Not disclosing foreign assets/income	ITR-1 is not applicable in such cases
Forgetting ISIN and transaction details	May lead to incorrect capital gains reporting

 

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