ITR Forms for AY 2025-26 released: Capital Gains reporting simplified for taxpayers in different tax forms

The Central Board of Direct Taxes (CBDT) has announced the release of all seven Income Tax Return (ITR) forms for the assessment year 2025-26, incorporating significant updates to capital gains reporting rules. These changes stem from the Union Budget 2024, effective 23 July 2024, which introduced revised long-term capital gains (LTCG) tax rules. 

It is important to be aware that Sahaj or ITR 1 can be filled out by resident individuals with an annual income of up to Rs 50 lakh, who receive income from salary, one house property, other sources (interest), and agricultural income up to Rs 5,000 per year. 

Sugam or ITR 4 can be filled out by individuals, Hindu Undivided Families (HUFs), and firms (excluding Limited Liability Partnerships (LLPs)) with a total annual income of up to Rs 50 lakh and income from business and profession. ITR-2 is to be filled out by individuals and HUFs without income from profits and gains in business or profession, but with income from capital gains. ITR-5 is to be filled out by firms, Limited Liability Partnerships, and Cooperative Societies. ITR-6 is to be filled out by companies registered under the Companies Act. ITR-7 is to be filled out by trusts and charitable institutions.

In the Budget 2024, the LTCG exemption limit for listed equity and equity mutual funds has been raised from Rs 1 lakh to Rs 1.25 lakh. Previously, taxpayers with LTCG under Section 112A that fell within the exemption limit were still required to file more complex ITR-2 or ITR-3 forms, even if no tax was payable due to the presence of capital gains income. This created challenges for small taxpayers. 

ITR 1

To address this issue, the Central Board of Direct Taxes (CBDT) has now allowed taxpayers to file the simpler ITR-1 and ITR-4 forms, even if they have LTCG under Section 112A, as long as the total LTCG does not exceed Rs 1.25 lakh and there are no brought forward or carry forward capital losses.

A key highlight is the increase in the LTCG exemption limit from Rs 1 lakh to Rs 1.25 lakh on listed equity shares and mutual funds, aiming to simplify tax filing for small taxpayers. 

ITR 2

The updated ITR-2 form now requires separate LTCG reporting for transactions conducted before and after 23 July 2024, reflecting the new rules on indexation and tax rates. Additionally, buyback proceeds from 1 October 2024 must be declared under both 'Income from Other Sources' and as 'Nil' consideration in the capital gains section. The threshold for mandatory disclosure of assets and liabilities has been revised, now applicable to individuals with incomes exceeding Rs 1 crore, up from Rs 50 lakh previously. These reforms are designed to enhance transparency and compliance among taxpayers with complex income portfolios.

ITR 4 

Further adjustments are observed in the ITR-1 and ITR-4 forms, now permitting the reporting of LTCG up to ₹1.25 lakh under Section 112A. This change is expected to alleviate the burden on smaller taxpayers, as they can now file these simpler forms if their LTCG remains within the specified limit without any carry forward capital losses. This move addresses past challenges where small taxpayers were required to file more complicated forms like ITR-2 or ITR-3. 

"Form ITR-1 (Sahaj) and Form ITR-4 (Sugam) did not contain any specific provision to report income under the head Capital Gains, including exempt long-term capital gains. As a result, taxpayers with such income were required to file other applicable ITR forms that provided the necessary reporting structure.
However, CBDT through Notification No. 40/2025 dated 29th April 2025, has introduced significant amendments to Form ITR-1 (Sahaj) and Form ITR-4 (Sugam) for the Assessment Year 2025–26, with the objective of simplifying the return filing process. As per the revised Form ITR-1 (Sahaj), a new option has been introduced under the 'Exempt Income' category in the dropdown menu, providing a specific field for reporting Long-Term Capital Gains (LTCG) under Section 112A that are not chargeable to Income-tax i.e., gains within the exemption limit of Rs. 1.25 lakhs on which no tax is payable," said CA Dr Suresh Surana.

He added: "The revised Form ITR-4 (Sugam) now includes a separate line item titled 'Income on which no tax is payable: Long-Term Capital Gains under Section 112A not chargeable to Income-tax,' also allowing taxpayers to report such exempt LTCG. This update enables taxpayers who are otherwise eligible to use ITR-1 or ITR-4 and who also have exempt LTCG income under Section 112A (such as gains from the sale of listed equity shares or units of equity-oriented mutual funds) to report such income directly within these simplified forms. However, carry forward and/or set-off of capital losses details cannot be provided in these forms." 

ITR 5 and ITR 6
 
The adjustments in the ITR-5 and ITR-6 forms echo similar themes. The ITR-5 allows firms and cooperative societies to separately report capital gains, and restricts loss claims from buyback transactions unless corresponding dividends are taxed under other income sources. This ensures genuine claims are made. Meanwhile, ITR-6, applicable to companies, now includes a detailed schedule for capital gains and updated requirements for cruise operators and diamond sales profits. 

"ITR 5 is designed for firms, Limited Liability Partnerships (LLPs), and including association of persons (AOPs), body of individuals (BOIs), artificial jurisdiction person and other similar entities. Similar to ITR 3, the form provides for separate reporting of capital gains upto 23 July  2024 and thereafter. Further the form allows claiming loss on account of buy back of shares only if associated dividend is offered to tax under income from other sources. This keeps a check on tax payers and only allows genuine claims. The form requires filling of TDS codes mandatorily," said Anita Basrur, Partner, Sudit K. Parekh & Co. LLP.

ITR 7

Lastly, the ITR-7 form, which serves trusts and charitable entities, has incorporated new disclosure norms. These forms, notified alongside others, reflect the government's commitment to maintaining an updated tax system that caters to the diverse needs of Indian taxpayers, while ensuring adherence to newly established guidelines. 

"ITR-7 is primarily meant for entities such as charitable or religious trusts, political parties, scientific research institutions, universities, colleges, and other institutions that are required to furnish returns under following sections: 
i.    Section 139(4A) - Income derived from Property held under Trust wholly / in part for charitable or religious purposes
ii.    Section 139(4B) - Chief Executive Officer of every Political Party
iii.    Section 139(4C) - Various entities like Research Association, News Agency, etc. mentioned in Section 10
iv.    Section 139(4D) - University, College or other Institution referred in Section 35," said CA Akshay Jain, Direct Tax Partner, NPV& Associates LLP.

Some of the changes made in ITR 7 are as follows:

> Changes have been in capital gains schedule of ITR 7 as well to give the effect of the amendments made under Finance Act 2024. With effect from 23rd July 2024 the tax rate on Long term capital gains have been increased to 12.5% from 10% and on short term capital gains have been increased to 20% from 15%. Therefore, taxpayers will have to report the capital gains separately for transactions made before and after 23rd July 2024.

> Before 1st October 2024, in case of buy back of shares by companies, tax on buy back of shares were borne by the companies and the proceeds received by the shareholders were exempt from tax. However with effect from 1st October 2024, proceeds received from buy back of shares by the shareholders will be treated as deemed dividend and the same has to be offered to tax by the shareholders as income from other sources. The cost of the shares which are bought back by the company will be available as capital loss to the shareholders.

> Form now includes fields for capturing details of deduction claimed as interest paid of borrowed money for the house property under section 24(b) of the Act. 

> Form also includes reporting of section codes under which TDS has been deducted. This will help the Income Tax department to verify whether TDS has been deducted correctly as per the provisions.