Equity Gains Above Rs 1.25 Lakh? Why ITR-1 May Not Be The Right Form

For assessment year (AY) 2026-27, income tax return-1 (ITR-1) has been expanded to cover a limited category of long-term capital gains from listed equity shares and equity-oriented mutual funds. The relaxation will help small investors, but it comes with a clear ceiling. If eligible long-term equity gains exceed Rs 1.25 lakh, ITR-1 cannot be used.

Choosing the right form is not a procedural detail. Filing a return in an unsuitable form can result in a defect notice, delay processing, or require the taxpayer to submit a revised return later.

ITR-1 Allows Only Limited Equity Gains

ITR-1, or Sahaj, is meant for resident individuals with total income of up to Rs 50 lakh and relatively simple income sources. It can cover salary or pension income, income from up to two house properties, specified interest income, family pension and agricultural income of up to Rs 5,000, according to a recent report by India Today.

This year, the form can also be used where long-term capital gains under Section 112A do not exceed Rs 1.25 lakh. These gains generally arise from the sale of eligible listed equity shares, equity-oriented mutual funds or units of a business trust.

The Rs 1.25 lakh mark matters for two reasons. It is the exemption threshold for such long-term capital gains and also the upper limit for using ITR-1. A taxpayer whose eligible gains are within this limit may continue with the simpler return, subject to meeting all other conditions.

However, the moment the gain crosses Rs 1.25 lakh, ITR-1 is no longer available. Even a small excess over the threshold means the taxpayer has to shift to ITR-2. The amount above Rs 1.25 lakh is taxable at 12.5 per cent under the applicable provisions.

When ITR-2 Becomes Necessary

ITR-2 is generally meant for individuals and Hindu Undivided Families that do not have business or professional income. It is designed to capture more detailed disclosures, including income from capital gains, multiple properties, foreign assets and other sources that do not fit within ITR-1.

Taxpayers with long-term equity gains above Rs 1.25 lakh will need to report the transactions in the capital gains schedules of ITR-2. The form also becomes relevant for those who have short-term capital gains from shares or mutual funds, gains from property, gold or debt investments, or capital losses that need to be set off or carried forward.

A taxpayer with short-term gains from listed shares cannot use ITR-1 even if the amount is small. Likewise, an individual who has held unlisted equity shares, served as a company director, earned business income, or owns foreign assets may have to use a different return form.

Check The Capital Gains Statement Before Filing

Investors should not rely only on the headline profit shown on a trading app or broker dashboard. They should download the capital gains statement for FY 2025-26 and separate short-term and long-term transactions. It is also important to identify whether the gains fall under Section 112A and whether any losses need to be adjusted or carried forward.

The details should be reconciled with the Annual Information Statement, Form 26AS and other tax records before submitting the return. Pre-filled information on the income-tax portal can be useful, but it should not replace a proper review of the taxpayer’s own records.

The simpler form may save time, but only when it is the correct one. For investors, spending a little more time on the capital gains calculation can help avoid a filing error that becomes difficult to correct later.

FAQs

Can I use ITR-1 if my long-term equity gains are exactly Rs 1.25 lakh?

Yes, ITR-1 can be used where eligible long-term capital gains under Section 112A do not exceed Rs 1.25 lakh, provided all other eligibility conditions are met.

Which ITR form should I use if my long-term equity gains exceed Rs 1.25 lakh?

You will need to file ITR-2, even if the gains exceed the Rs 1.25 lakh threshold by a small amount. The excess gain is taxable at the applicable rate.

Can I use ITR-1 if I have short-term capital gains from shares or equity mutual funds?

No. Short-term capital gains from listed shares or equity-oriented mutual funds make a taxpayer ineligible for ITR-1, regardless of the amount involved.