STCG vs. LTCG: The 12-Month Rule
The first step is to classify your gains. For listed equity shares and equity mutual funds, the holding period is the key. If you sell an investment within 12 months of buying it, the profit is a Short-Term Capital Gain (STCG). If you hold it for more
than 12 months, the profit is a Long-Term Capital Gain (LTCG). This distinction is crucial because they are taxed at different rates. For the current filing season (AY 2026-27), STCG from equities is taxed at a flat rate of 20%, while LTCG is taxed at 12.5%.
The Powerful ₹1.25 Lakh LTCG Exemption
There's good news for long-term investors. Under Section 112A of the Income Tax Act, the first ₹1.25 lakh of your total LTCG from listed equities and equity funds in a financial year is completely tax-free. You only pay the 12.5% tax on the amount that exceeds this limit. This exemption resets every financial year, making it a powerful tool for tax planning. Many investors make it a point to book long-term gains up to this limit each year to take advantage of the tax-free benefit.
Choosing the Right ITR Form
Not all ITR forms are created equal. If you are a salaried individual and have capital gains income, you cannot use the simple ITR-1 form. You must file using ITR-2. This form has specific schedules to report your capital gains in detail. If you have income from a business or profession, which includes intraday trading or F&O, you must use ITR-3. Choosing the wrong form is a common error that can lead to a defective return, so it's vital to get this right.
Reporting Gains: Schedule CG and 112A
When you open ITR-2, the main section for your gains is 'Schedule CG' (Capital Gains). This schedule requires you to provide separate, consolidated figures for your short-term and long-term gains. For LTCG specifically, you'll also need to fill out 'Schedule 112A'. This requires scrip-wise details for your long-term transactions, including the ISIN, purchase cost, and sale value. While this sounds tedious, your stockbroker provides a detailed capital gains statement that has all this information neatly organised, which you can use to fill the form. Many also provide a CSV file that can be directly uploaded to the portal.
Don't Forget to Offset Your Losses
A savvy investor never lets a loss go to waste. The tax rules allow you to set off your capital losses against your gains, reducing your overall tax liability. A Short-Term Capital Loss (STCL) is the most flexible; it can be set off against both STCG and LTCG. However, a Long-Term Capital Loss (LTCL) can only be set off against LTCG. If you have losses remaining after setting them off, you can carry them forward for up to eight assessment years, but only if you file your ITR by the due date. This makes timely filing essential for investors.
