ITR-2 for AY 2026-27: How to Report Capital Gains Correctly

If you sold mutual funds, a few shares, or a flat this year and then opened the ITR form expecting a simple box to type your profit into, you already know the trap. There isn't one. Capital gains reporting in ITR-2 is arguably the single most error-prone part of the entire return — and the tax department's Annual Information Statement (AIS) now sees almost every transaction you made, which means a mismatch triggers a notice faster than ever.

Here's a number that surprises most salaried investors: for equity mutual funds and listed shares held over 12 months, long-term capital gains up to ₹1.25 lakh per financial year are completely exempt — but you still have to report them. Miss that reporting, and the ₹90,000 gain you thought was tax-free can still land you a defective-return notice under Section 139(9). The exemption protects your tax; it does not protect you from disclosure.

This guide is a plain-language, step-by-step walkthrough of ITR-2 capital gains filing AY 2026-27 for salaried people with mutual fund, share, or property gains. We'll cover which schedule goes where, the exact grandfathering and indexation rules that trip people up, a fully worked example with rupee figures, and the common mistakes that invite scrutiny. Keep AlarmDaddy's Income Tax Calculator open in another tab — you'll want to sanity-check your final liability.

Key Takeaways

• Salaried investors with any capital gains cannot use ITR-1 — you must file ITR-2 (or ITR-3 if you also have business income).
• For sales on or after 23 July 2024, equity LTCG is taxed at 12.5% (above the ₹1.25 lakh exemption) and STCG at 20%.
• Grandfathering (fair market value as on 31 Jan 2018) still applies to equity bought before that date — get the cost right or you'll overpay.
• Property and debt gains use different rules; for land/building bought before 23 July 2024 you can choose 12.5% without indexation or 20% with indexation, whichever is lower.
• Reconcile every entry against your AIS and the broker/AMC capital gains statement before filing to avoid a mismatch notice.
• Schedule CG feeds Schedule SI (special-rate income) automatically — never manually add gains to your salary slab income.

Why salaried investors must use ITR-2 (not ITR-1)

ITR-1 (Sahaj) is the simple form for salary, one house property, and other income like interest. The moment you have any capital gain — even a tiny ₹500 profit from redeeming a mutual fund — ITR-1 is off the table.

ITR-2 is the correct form for a resident salaried individual with:

• Capital gains from shares, mutual funds, or property
• More than one house property
• Foreign assets or foreign income (RSUs/ESOPs of a US parent, for example)
• Total income above ₹50 lakh

If you also run a business or profession (freelancing, F&O trading treated as business), you'd move to ITR-3 instead. But for the vast majority of salaried folks with SIPs and a demat account, ITR-2 is home. Before you even open the form, download your interest certificate and capital gains statements — you'll need the exact figures.

Understanding the capital gains rules for AY 2026-27

AY 2026-27 corresponds to income earned in FY 2025-26 (1 April 2025 to 31 March 2026). The rules that apply were reset by the July 2024 Budget, and this is the first "clean" year where they apply for the entire twelve months. Here's the framework you need firmly in your head.

Equity shares and equity mutual funds

• Short-term (held ≤ 12 months): STCG taxed at 20% under Section 111A.
• Long-term (held > 12 months): LTCG under Section 112A. First ₹1.25 lakh of aggregate equity LTCG in the year is exempt; the balance is taxed at 12.5% with no indexation.
• Grandfathering: For shares/equity funds bought before 1 Feb 2018, your cost of acquisition is the higher of actual cost and (the lower of FMV on 31 Jan 2018 and sale price).

Debt mutual funds and other assets

Debt funds bought on or after 1 April 2023 are always taxed at slab rates as STCG regardless of holding period — no LTCG benefit, no indexation. Debt funds bought earlier follow the older 36-month rule.

Property (land and building)

Holding period for long-term is 24 months. For property acquired before 23 July 2024, you get a choice on LTCG: pay 12.5% without indexation or 20% with indexation — whichever gives lower tax. For property bought on or after that date, it's a flat 12.5% without indexation. The Cost Inflation Index for FY26-27 matters only if you take the indexation route.

How to fill Schedule CG in ITR-2 step by step

Schedule CG (Capital Gains) is where all the reporting happens. Here's the walkthrough for the online utility on the income tax portal.

1. Log in and start ITR-2. On the portal, choose "File Income Tax Return," select AY 2026-27, and pick ITR-2. Much of your salary and TDS data will pre-fill from Form 16 and Form 26AS.
2. Open Schedule CG. You'll see separate blocks for short-term and long-term gains, further split by asset type.
3. Equity STCG (Section 111A): Enter full sale consideration, cost of acquisition, and transfer expenses (brokerage, STT is not deductible). The net STCG flows to the 20% rate block.
4. Equity LTCG (Section 112A): This is the fiddly one. There's a dedicated schedule requiring scrip-wise or consolidated entry — ISIN, name, number of units, sale value, cost, and FMV as on 31 Jan 2018 (for grandfathering). Most brokers (Zerodha, Groww) and AMCs give a downloadable 112A CSV you can upload directly.
5. Property gains: Under the long-term block for land/building, enter sale value, indexed or actual cost, and any Section 54/54EC exemption claimed (reinvestment in a house or capital gains bonds).
6. Set off and carry forward: If you have capital losses, the portal lets you set them off. Short-term losses offset both STCG and LTCG; long-term losses offset only LTCG. Unabsorbed losses carry forward up to 8 years — but only if you file by the due date.
7. Verify Schedule SI: Special-rate income (your 20% STCG and 12.5% LTCG) auto-populates into Schedule SI. Do not manually add these gains to your normal slab income — that's double taxation and a classic mistake.
8. Cross-check the tax computation against the Income Tax Calculator before submitting.

Common mistake: Many people enter the net profit from their broker's P&L statement in a single box instead of filling the scrip-wise 112A schedule with FMV. This skips grandfathering entirely and often makes you pay tax on gains that accrued before 1 Feb 2018. Always use the sale-value / cost / 31-Jan-2018-FMV columns properly.

A fully worked example: Priya's capital gains for FY 2025-26

Let's make this concrete. Priya is a salaried IT professional earning ₹18 lakh a year. During FY 2025-26 she had three transactions.

Transaction 1 — Equity mutual fund (long-term)

She redeemed units of an equity fund in September 2025. Sale value ₹6,00,000; original cost ₹3,50,000; units bought in 2020 (no grandfathering needed). LTCG = ₹6,00,000 − ₹3,50,000 = ₹2,50,000.

Transaction 2 — Listed shares (short-term)

She sold shares held for 7 months. Sale value ₹1,80,000; cost ₹1,50,000. STCG = ₹30,000, taxed at 20% under Section 111A.

Transaction 3 — Equity fund purchased before 2018 (grandfathering)

Bought for ₹1,00,000 in 2016; FMV on 31 Jan 2018 was ₹1,40,000; sold in Jan 2026 for ₹2,00,000. Grandfathered cost = higher of actual (₹1,00,000) and lower of (FMV ₹1,40,000, sale ₹2,00,000) = ₹1,40,000. LTCG = ₹2,00,000 − ₹1,40,000 = ₹60,000.

Putting it together

• Total equity LTCG = ₹2,50,000 + ₹60,000 = ₹3,10,000
• Less exemption under 112A = ₹1,25,000
• Taxable LTCG = ₹1,85,000 × 12.5% = ₹23,125
• STCG = ₹30,000 × 20% = ₹6,000
• Capital gains tax (before cess) = ₹29,125; add 4% cess ≈ ₹30,290

This ₹30,290 sits on top of Priya's regular salary tax and does not enjoy slab rates or the Section 87A rebate (special-rate income is excluded from 87A). If you want to see how the Section 87A rebate interacts with your salary, that's a separate calculation. To project how much your SIPs might grow into future taxable gains, run the numbers through our SIP Calculator.

Old rules vs new rules: how the tax differs by asset

Because the July 2024 changes affect assets differently, here's a comparison of how a ₹5 lakh gain is treated across five common scenarios in AY 2026-27.

Asset type	Holding for LTCG	LTCG rate	STCG rate	Indexation?
Equity shares / equity MF	> 12 months	12.5% (after ₹1.25L exempt)	20%	No
Property (bought before 23 Jul 2024)	> 24 months	12.5% no-index OR 20% with index (lower)	Slab rate	Optional
Property (bought on/after 23 Jul 2024)	> 24 months	12.5%	Slab rate	No
Debt MF (bought on/after 1 Apr 2023)	N/A	Slab rate (treated as STCG)	Slab rate	No
Gold / unlisted / other assets	> 24 months	12.5%	Slab rate	No

The takeaway: equity is treated most gently, debt funds bought after April 2023 are hit hardest (pure slab rate), and property owners have a valuable choice worth calculating carefully. If you're weighing whether to sell a property, model the after-tax proceeds against reinvestment options — our Lumpsum Investment Calculator and ROI Calculator help here.

How to reconcile with AIS before you file

This is the step that saves you from a notice. The AIS reflects data reported by brokers, AMCs, and registrars. Filing figures that don't match is the fastest way to get flagged.

1. Download your AIS and TIS from the income tax portal ("Services" → "Annual Information Statement").
2. Download the capital gains statement from each broker and the consolidated CAS from CAMS/KFintech for mutual funds.
3. Match transaction by transaction. Check sale value, dates, and whether the fund is equity or debt oriented.
4. Flag discrepancies. If AIS shows a figure you disagree with, submit online feedback rather than silently ignoring it.
5. Only then transfer figures into Schedule CG.

Pro tip: AIS sometimes double-counts a transaction when both the broker and the depository report the same trade, or shows a "sale value" without the corresponding cost. Don't panic and don't blindly copy AIS totals into your return. Your broker's capital gains statement — which nets purchase against sale — is usually the more reliable base. Use AIS as a reconciliation tool, not the source of truth.

Advance tax and interest on capital gains

Here's something salaried investors routinely forget: capital gains create advance tax obligations. Your employer's TDS on salary won't cover the tax on a ₹4 lakh property or equity gain. If your total tax liability after TDS exceeds ₹10,000, advance tax rules under Sections 234B and 234C apply.

The relief: because you can't predict gains in advance, the shortfall arising from capital gains is treated leniently — you're expected to pay the tax in the remaining advance-tax installment after the gain occurs. Still, if you sold in March and paid nothing until July, expect some interest. Estimate it early using the Income Tax Calculator and, if the tax is large, pay a self-assessment installment before 31 March.

Planning capital gains sales before year-end pairs well with other last-minute tax moves before 31 March, so it's worth doing both together.

A pre-filing checklist for ITR-2

• ✅ Form 16 and Form 26AS reconciled with salary and TDS
• ✅ Capital gains statements downloaded from every broker and AMC
• ✅ 112A scrip-wise CSV ready for equity LTCG upload
• ✅ 31 Jan 2018 FMV confirmed for pre-2018 holdings
• ✅ Property sale deed, purchase deed, and improvement receipts filed
• ✅ Section 54/54EC exemption details and reinvestment proof (if claimed)
• ✅ Capital losses from prior years pulled from last year's return for carry-forward
• ✅ AIS feedback submitted for any mismatched entries
• ✅ Final liability cross-checked and any self-assessment tax paid

Salary perks like RSUs and ESOPs deserve special attention — the perquisite value taxed at vesting becomes your cost of acquisition when you later sell, and getting this wrong is common. Read up on the new perquisite tax rules for 2026 if equity compensation is part of your package.

Frequently asked questions

Can I file ITR-1 if I only have a small capital gain?

No. Any capital gain, however small, disqualifies you from ITR-1. Even a ₹200 gain from redeeming mutual fund units means you must file ITR-2. There is no de minimis threshold for this rule.

Do I have to report LTCG that is under the ₹1.25 lakh exemption?

Yes. The ₹1.25 lakh is an exemption from tax, not from disclosure. You must still report the full gain in Schedule CG; the utility applies the exemption automatically. Non-disclosure can trigger a defective-return notice.

What is the FMV on 31 January 2018 and where do I find it?

For grandfathering equity bought before 1 Feb 2018, the FMV is the highest quoted price on the stock exchange on 31 Jan 2018 (for shares) or the NAV on that date (for equity funds). Your broker's or AMC's 112A statement usually pre-fills this figure.

Are STT and brokerage deductible from capital gains?

Brokerage and transfer expenses are deductible from the sale consideration. Securities Transaction Tax (STT), however, is specifically not deductible for equity gains taxed under Sections 111A and 112A.

Can I set off capital losses against my salary income?

No. Capital losses can only be set off against capital gains — short-term losses against any capital gain, long-term losses only against long-term gains. They cannot reduce your salary. Unused losses carry forward up to 8 assessment years if you file on time.

What is the due date for ITR-2 for AY 2026-27?

For individuals not subject to audit, the usual due date is 31 July 2026 (subject to any extension the CBDT announces). Filing after the due date means you lose the right to carry forward capital losses, so meeting it matters.

Do capital gains get the Section 87A rebate?

Income taxed at special rates — like 12.5% LTCG and 20% STCG on equity — is excluded from the Section 87A rebate. So even if your total income is under the rebate threshold, the tax on these special-rate gains is still payable.

Final word on ITR-2 capital gains filing AY 2026-27

The reason capital gains reporting feels intimidating isn't the tax rates — those are straightforward once you know them. It's the reconciliation, the grandfathering arithmetic, the scrip-wise 112A schedule, and the advance-tax surprise. Get those four right and your ITR-2 capital gains filing AY 2026-27 becomes a mechanical, notice-free exercise.

Work through your figures methodically: download every statement, match against AIS, fill Schedule CG scrip by scrip, let Schedule SI compute the special-rate tax, and verify the total against a trusted calculator. Start early enough that any advance-tax shortfall can be paid before 31 March. A morning of careful work now beats a scrutiny notice eighteen months later.

Before you hit submit, run your final numbers through AlarmDaddy's Income Tax Calculator, model future SIP gains with the SIP Calculator, and explore our full suite of free financial calculators to plan the rest of your year. If you'd like to know more about how we build these tools, visit our about page or get in touch with any feedback.

This article is for educational purposes and does not constitute individual tax advice. For complex transactions — especially property sales, ESOPs, or foreign assets — consult a qualified chartered accountant.

Image credit: Scrabble Series Income Tax — ccPixs.com, via flickr (BY 2.0), sourced from Openverse.