Many individual taxpayers view filing an Income Tax Return (ITR) as a straightforward task—declaring salary income, updating investment details and paying any balance tax. However, capital gains can turn an otherwise straightforward tax return into a complicated exercise.Post Covid, it has become common for salaried employees to invest in and trade equities and similar assets. During the year, they may sell shares, redeem mutual funds, book gains from foreign Employee Stock Options (ESOPs), Restricted Stock Units (RSUs) or other investments, or dispose of inherited property. At first glance, while these transactions may seem straightforward, an incorrect holding period, mismatch with the Annual Information Statement (AIS), or missed foreign asset disclosure can lead to tax notices, delayed refunds or additional tax demands.As the ITR filing season for Financial Year (FY) 2025–26 progresses, capital gains reporting is under greater scrutiny than ever. With the Income tax department increasingly using technology, data analytics, AIS, broker reports, mutual fund disclosures and overseas information exchange, filing an accurate ITR now requires not only correct tax computation but also complete and consistent reporting.
Eight common capital gains mistakes taxpayers make
Before diving into the rules, taxpayers should watch out for some of the most common errors:
- Missing one or more buy or sale transactions across multiple brokers, funds.
- Applying the wrong holding period and misclassifying gains as short-term or long-term.
- Relying only on brokerage statements without reconciling the figures with AIS.
- Ignoring gains from foreign shares, overseas ETFs or global investment platforms.
- Reporting cryptocurrency transactions only on a net-profit basis.
- Missing exemption deadlines under Sections 54, 54F or 54EC.
- Failing to disclose foreign assets, where applicable.
- Losing the benefit of carry forward losses because the ITR was not filed within the due date.
Many tax notices arise not from deliberate underpayment of tax, but from incomplete or inaccurate reporting.
Start by identifying the nature of capital gains
The first step in capital gains taxation is to identify the asset sold and determine whether the resulting gains is taxable. Generally, profits from the sale or transfer of a capital asset are taxed in the year of transfer, after deducting:
- The cost of acquisition;
- Eligible improvement costs;
- Expenses directly connected with the transfer; and
- Applicable exemptions, where the law permits reinvestment.
While the principle appears straightforward, many taxpayers encounter difficulties in correctly identifying the nature of the gain and applying the correct tax provisions.
Capital gains: 8 mistakes to avoid
Why correct classification matters
One of the most common errors in capital gains reporting is the incorrect classification of gains as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG).For example, consider two investors who sell listed shares: one after holding them for 8 months and the other after 14 months. Although both transactions involve the same asset class, their tax treatment may differ significantly.This distinction is important because tax rates, exemptions, loss set-off rules and reporting requirements can differ significantly for short-term and long-term gains. The key factor is the holding period, which differs across asset classes, taxpayers should first identify the asset category and then apply the relevant rule.
Capital gains: Key Holding Periods and Tax Rates
Shares and mutual funds: Similar investments, different tax consequences
Shares and mutual funds may appear similar from an investment perspective, but their tax treatment can differ significantly. Listed equity shares and equity-oriented mutual funds are generally taxed on similar lines. Long-term gains from these assets currently enjoy an annual exemption of Rs 1.25 lakh before tax applies.However, not all mutual funds qualify as equity funds. Debt funds, international funds, gold funds, fund-of-funds and certain hybrid schemes may follow different tax rules. For instance, debt mutual fund investments made on or after April 1, 2023, generally do not qualify for long-term capital gains treatment and may be taxed at the taxpayer’s applicable slab rates.Taxpayers should therefore identify the nature of the investment carefully before reporting the gains.
Understanding grandfathering and the end of indexation
Changes in tax law can often create confusion for taxpayers. One such concept is grandfathering. In simple terms, it’s beneficial as it ensures tax certainty for taxpayers by ensuring that any change of law takes effect from a future date and not with retrospective effect. Grandfathering ensures that gains earned before a change in tax law are not unfairly taxed under the new tax law.For example, when long-term capital gains tax on listed equity investments was reintroduced from April 1, 2018, gains accrued up to January 31, 2018, were protected under special grandfathering provisions and remained exempt from tax.Another key change is the withdrawal of indexation benefits for many capital assets. Earlier, indexation allowed taxpayers to adjust the cost of acquisition for inflation, so tax applied only to real gains after excluding inflation-driven appreciation. Under the revised framework, many long-term gains are taxed at 12.5% without indexation. While the lower rate may appear beneficial, the absence of inflation adjustment can increase taxable gains for assets held over several years.
Residential property has an important exception: A practical illustration
Consider a taxpayer who bought a residential property several years ago and sells it in the FY 2025-26. In such cases, the taxpayer may be able to choose between:
- Tax at 12.5% without indexation; or
- Tax at 20% with indexation.
The more beneficial option will depend on the holding period, inflation and actual appreciation. Taxpayers should therefore compare both calculations before filing.
Unlisted Shares, Foreign investments, ESOPs and RSUs require special attention
Global companies increasingly issue ESOPs and RSUs to employees across jurisdictions. At the same time, many individuals invest in unlisted shares, U.S. stocks, foreign exchange-traded funds and overseas mutual funds through digital platforms. These investments require careful attention because their tax treatment and reporting requirements differ from those for standard listed equity investments. Since unlisted shares are not traded on recognised stock exchanges, valuation and documentation are important. Short-term gains are generally taxed at slab rates, while long-term gains are taxed at 12.5% without indexation.Foreign investments, whether held directly or through overseas brokers, generally do not receive the same concessional tax treatment as Indian listed shares. Foreign tax credit may be available, but claiming it involves additional compliance requirements.In addition to computing gains correctly, taxpayers may need to:
- Maintain foreign broker statements;
- Retain proof of foreign taxes paid;
- Keep currency conversion workings;
- Evaluate eligibility for foreign tax credit; and
- Report foreign assets, where applicable.
With growing exchange of financial information between countries, accurate reporting of foreign income and assets has become critical.ESOPs and RSUs can also trigger more than one tax event. The first event generally occurs when shares are allotted or exercised, when the value may be taxed as a salary perquisite. The second generally arises when the shares are sold and capital gains are computed. For capital gains purposes, the holding period is usually counted from the date of allotment, and foreign company shares may also need to be disclosed in Schedule Foreign Assets of the ITR.Many employees report the salary component correctly but miss the capital gains implications that arise later.
Investments that require extra attention
Crypto: One of the most misunderstood areas of taxation
Cryptocurrency remains one of the most misunderstood areas of tax compliance. Many investors report only their net annual profit. However, this may not meet the reporting requirements for Virtual Digital Assets.Under the current framework:
- Gains are taxed at a flat rate of 30%, regardless of income level;
- Only the acquisition cost is allowed as a deduction;
- Losses cannot be set off against other income or carried forward;
- Crypto received as a gift may be taxable for the recipient;
- Transactions must be reported separately in Schedule VDA; and
- A 1% TDS may apply in specified cases.
Each transaction should generally be identified and reported separately, including crypto-to-crypto trades and transactions on overseas platforms or exchanges.Accurate reporting of crypto in ITR is critical. Crypto cannot be reported only on a net-profit basis; each transaction must be captured separately, making detailed records essential including crypto-to-crypto trades and transactions through foreign platforms. Incomplete reporting can create mismatches with AIS, Form 26AS or exchange records, particularly as tax authorities increasingly rely on analytics and tracking systems.
Investment or business income?
Profits from securities are not always taxed as capital gains. For instance:
- Intraday trading profits are generally treated as business income, not capital gains; and
- Gains or losses from Futures and Options transactions are generally treated as non-speculative business income.
This distinction matters because business income and capital gains follow different rules for computation, loss set-off, expense deductions and reporting.
Tax-saving opportunities that taxpayers often miss
Despite changes to capital gains taxation, taxpayers can still reduce their tax liability by using specific exemption provisions. Some of the widely used exemptions include:Section 54 – applies when gains from a long-term residential property are reinvested in another residential property in India.Section 54F – applies when sale proceeds from certain long-term capital assets, other than residential property, are invested in a residential property.Section 54EC – applies when eligible gains are invested in specified bonds, such as NHAI or REC bonds, within six months, subject to the prescribed investment limit.However, taxpayers often lose these exemptions by missing procedural requirements. If the prescribed conditions, timelines or documentation requirements are not met, the exemption may be denied.
Do not ignore capital losses
Taxpayers often focus on gains and overlook the tax value of capital losses. This can prove costly.Short-term capital losses can generally be set off against both short-term and long-term capital gains. Long-term capital losses can generally be set off only against long-term capital gains.Unabsorbed capital losses can generally be carried forward for up to eight assessment years if the return is filed by the prescribed due date.A delayed ITR filing can therefore result in the loss of a valuable tax benefit.
Inherited assets and gifts: A frequently misunderstood area
Many taxpayers assume inherited property or gifted investments are irrelevant for capital gains purposes.While receiving an asset through inheritance is generally not a taxable capital gains event, tax implications may arise when the asset is later sold.In such cases, determining the cost of acquisition and holding period may require special analysis. Taxpayers should retain historical records wherever possible and review the relevant provisions before reporting the gains.
Capital gains reporting is no longer routine compliance
Capital gains reporting has evolved far beyond a simple exercise of calculating profits and paying tax.Today’s taxpayers must navigate changing tax laws, overseas investments, digital assets, exemption provisions, disclosure schedules and increasingly sophisticated data analytics by tax authorities.The greatest risk often lies not in aggressive tax planning but in incomplete information, inadequate documentation, incorrect classification or reliance on outdated rules.As AIS, Form 26AS, broker reports, mutual fund disclosures and international information exchange become more connected, even minor inconsistencies can lead to scrutiny, delayed refunds or avoidable tax demands.The safest approach is to:
- Maintain complete transaction records;
- Verify holding periods;
- Reconcile figures with AIS and Form 26AS;
- Evaluate applicable Exemptions before filing; and
- Preserve documents relating to foreign investments and assets.
For taxpayers with capital gains, spending a few extra hours before filing the ITR can save months of follow-up, unnecessary tax costs and avoidable stress later.(The author, Ravi Jain, is Tax Partner at Vialto Partners. Vikas Narang, Director, and Teja T C, Associate, at Vialto Partners have also contributed to this article. Views are personal.)
