ITR-1 or ITR-2? Why Equity Gains Above Rs 1.25 Lakh Need a Different Tax Return

Many salaried taxpayers preparing to file their Income Tax Return (ITR) for Assessment Year (AY) 2026-27 may need to pay closer attention to the form they choose this year.

While ITR-1 (Sahaj) continues to be the simplest return form for many individuals, taxpayers who earned long-term capital gains (LTCG) from equity shares or equity-oriented mutual funds exceeding Rs 1.25 lakh during the financial year may have to file ITR-2 instead.

Choosing the wrong ITR form can lead to defective return notices, delayed processing or even the need to revise the return later.

What Has Changed This Year?

The Income Tax Department has expanded the scope of ITR-1 by allowing certain taxpayers with long-term capital gains to continue using the form.

However, this benefit comes with an important condition.

You can file ITR-1 only if your long-term capital gains from listed equity shares and equity mutual funds do not exceed Rs 1.25 lakh during the financial year.

If your LTCG crosses this threshold, ITR-2 becomes mandatory, even if you are otherwise a salaried employee with no business income.

Who Can Continue Filing ITR-1?

You may still be eligible to file ITR-1 if you meet all the prescribed conditions, including:

• Salary or pension income.
• Income from one house property (subject to specified conditions).
• Income from other sources such as bank interest.
• Agricultural income within the permitted limit.
• Long-term capital gains from eligible equity investments up to Rs 1.25 lakh.

If your income profile falls within these limits, ITR-1 remains the simplest filing option.

When Should You File ITR-2?

You should generally choose ITR-2 if:

• Long-term capital gains from equity exceed Rs 1.25 lakh.
• You have multiple capital gain transactions requiring detailed reporting.
• You have income from more than one house property (subject to applicable rules).
• You hold foreign assets or certain other specified income categories.
• Your income profile does not meet ITR-1 eligibility conditions.

ITR-2 allows taxpayers to report capital gains in greater detail than ITR-1.

Why Choosing the Correct ITR Form Matters

Selecting the wrong return form can create unnecessary complications.

Possible consequences include:

• Defective return notices.
• Delayed tax refunds.
• Additional compliance requirements.
• Return rejection in certain situations.
• Need to revise the filed return.

Checking eligibility before filing can help avoid these issues.

Check Your Capital Gains Statement First

Before beginning the filing process, taxpayers should carefully verify:

• Annual capital gains statement.
• Broker reports.
• Mutual fund statements.
• Annual Information Statement (AIS).
• Form 26AS.
• Tax Information Summary (TIS).

Reconciling these records ensures the correct reporting of capital gains and helps determine the appropriate ITR form.

Understanding the Rs 1.25 Lakh Limit

The Rs 1.25 lakh threshold applies specifically to eligible long-term capital gains arising from listed equity shares and equity-oriented mutual funds.

If your gains exceed this amount during the financial year, filing through ITR-2 is generally required, even if your salary income qualifies you for ITR-1 in every other respect.

Taxpayers should carefully compute their gains before selecting a return form.

Tips Before Filing Your Return

Before submitting your return, make sure to:

• Verify your AIS and Form 26AS.
• Match capital gains with broker statements.
• Check dividend income.
• Review TDS details.
• Confirm bank account information.
• Select the correct ITR form.

Taking a few extra minutes before filing can help prevent notices and delays later.

Featured Snippet

Taxpayers with long-term capital gains from listed equity shares or equity mutual funds exceeding Rs 1.25 lakh during FY 2025-26 may not be eligible to file ITR-1 for AY 2026-27. In such cases, ITR-2 is generally required.

Key Highlights

• ITR-1 eligibility has been expanded but with conditions.
• Equity LTCG above Rs 1.25 lakh requires ITR-2.
• Choosing the wrong return form can delay processing.
• Taxpayers should review capital gains statements carefully.
• AIS, Form 26AS and broker reports should be reconciled before filing.
• Correct ITR selection helps avoid defective return notices.

Eligibility

ITR-1

Eligible taxpayers with salary income and specified long-term equity gains up to Rs 1.25 lakh.

ITR-2

Required where long-term equity capital gains exceed Rs 1.25 lakh or other eligibility conditions for ITR-1 are not met.

Documents Required

• PAN
• Aadhaar
• Form 16
• Form 26AS
• AIS
• TIS
• Broker capital gains statement
• Mutual fund statements
• Bank account details
• Investment records

How to File

1. Calculate your total income.
2. Compute long-term capital gains.
3. Check whether gains exceed Rs 1.25 lakh.
4. Choose the appropriate ITR form.
5. Verify income details.
6. File and e-verify your return.

Conclusion

The revised ITR rules for AY 2026-27 make it easier for many salaried taxpayers to continue using ITR-1, but only within specified limits. If your long-term capital gains from equity investments exceed Rs 1.25 lakh, filing ITR-2 is generally necessary. Reviewing your capital gains statement before filing can help ensure compliance and reduce the risk of notices or processing delays.

FAQs

1. Can I file ITR-1 if my equity gains exceed Rs 1.25 lakh?
Generally, no. Taxpayers exceeding the prescribed limit are typically required to file ITR-2.

2. Does the Rs 1.25 lakh limit apply to all capital gains?
The threshold applies to eligible long-term capital gains from listed equity shares and equity-oriented mutual funds under the applicable rules.

3. Why is ITR-2 required?
ITR-2 provides detailed reporting for capital gains that cannot be fully disclosed in ITR-1.

4. What happens if I choose the wrong ITR form?
Your return may be treated as defective, delayed or require revision.

5. Which documents should I check before filing?
Review Form 16, AIS, Form 26AS, broker statements, mutual fund reports and capital gains statements.

6. Who should use ITR-1?
Eligible individuals whose income and capital gains fall within the conditions specified by the Income Tax Department.