Salaried with Capital Gains? Why You File ITR-2 (AY 2026-27)

Why a capital gain means ITR-2

ITR-1 (Sahaj) is the simple return for salaried people with straightforward income. The moment you have a capital gain, from selling listed shares, redeeming mutual fund units, or selling property, you generally step outside ITR-1 and must file ITR-2 instead.

The rule is strict: any capital gains transaction during the year, regardless of the amount, disqualifies you from ITR-1. Even a tiny gain from selling a few shares pushes you to ITR-2. There is one narrow new exception for AY 2026-27, if your only capital gain is long-term under Section 112A up to ₹1.25 lakh, with no loss to carry forward, ITR-1 is now permitted. Beyond that, it is ITR-2.

If you also have business or professional income, such as freelancing alongside your investing, you file ITR-3 instead. Our ITR-2 schedules guide walks through the full form.

The rates you need to know

Capital gains on listed equity and equity mutual funds are taxed at special rates, which changed in 2024. The current position for AY 2026-27:

The equity STCG rate rose from 15% to 20% with effect from 23 July 2024, and equity LTCG is 12.5% with no indexation, on gains above a ₹1.25 lakh annual exemption. Note that the Section 87A rebate does not apply to gains taxed under 111A or 112A, so these are taxed even if your total income is otherwise within the rebate limit. Rates are set by the Finance Act and can change, so confirm the current figures.

Short-term vs long-term

The dividing line for listed equity and equity mutual funds is a 12-month holding period. Held for 12 months or less, the gain is short-term (STCG); held for more than 12 months, it is long-term (LTCG). Different assets have different thresholds, property and debt instruments use a 24-month line, so check the asset.

The distinction matters because the rate and the exemption differ. Equity LTCG enjoys the ₹1.25 lakh annual exemption and the lower 12.5% rate; equity STCG is taxed at the flat 20% from the first rupee. Where you have a choice about when to sell, the holding period can meaningfully change your tax.

Grandfathering for older shares

If you bought listed shares or equity mutual funds before 1 February 2018, a grandfathering rule protects your older gains. Your cost of acquisition is taken as the higher of your actual cost, or the lower of the fair market value on 31 January 2018 and the sale price.

In plain terms, gains that had accrued up to 31 January 2018 are shielded, you are only taxed on the appreciation since then. This matters a great deal for long-held holdings, and getting it wrong means overpaying. In Schedule 112A you enter scrip-wise detail, each stock or fund with its cost, sale value and quantity, and the portal applies the grandfathered cost.

How to report in Schedule CG

Reporting happens in Schedule CG of ITR-2, with short-term and long-term gains entered separately:

• Equity STCG (111A): enter the total sale consideration, cost of acquisition and transfer expenses; the portal computes the 20% tax.
• Equity LTCG (112A): enter scrip-wise detail, each holding with buy cost, sale value and quantity. The portal offers a per-scrip entry or a bulk-upload Excel template, use whichever matches your broker statement.
• Other gains: debt mutual funds, property, gold and unlisted shares go in their own rows at the applicable rates.

Then set off losses correctly. A short-term capital loss can offset both short-term and long-term gains; a long-term loss offsets only long-term gains. Finally pay any self-assessment tax, submit, and e-verify within 30 days. Our income tax and ITR service handles Schedule CG and the loss set-offs so the computation is right.

Common mistakes to avoid

A few errors catch salaried investors every year:

• Filing ITR-1 with a capital gain. This makes the return defective. Any gain (beyond the narrow 112A exception) means ITR-2.
• Forgetting a mutual fund switch. A switch or STP is a redemption; it is in your AIS whether you remember it or not.
• Ignoring grandfathering. Not using the 31 January 2018 value on old shares means paying tax on gains that are legally shielded.
• Not matching the AIS. The department already has your transactions from your broker. File to match your AIS, or reconcile any error before filing, or expect a notice.
• Missing the loss set-off. Unclaimed losses are lost tax savings, set off and carry forward correctly.

Because the department cross-checks your return against the AIS, which is built from your broker and fund-house reporting, accuracy matters more here than almost anywhere else in the return.

Quick answers

Do I file ITR-1 or ITR-2 with capital gains? ITR-2, unless your only gain is LTCG under 112A up to ₹1.25 lakh with no loss to carry forward. What is the equity STCG rate? 20% under Section 111A. What is the LTCG rate? 12.5% above ₹1.25 lakh under Section 112A, no indexation. Does a mutual fund switch count? Yes, it is a redemption and appears in your AIS. What about pre-2018 shares? Grandfathering uses the higher of actual cost or the 31 January 2018 fair value. Want it filed right? Our tax team handles capital-gains returns.