Income Tax filing is necessary for individuals to meet their compliance regulations. Different forms are given by the Income Tax Department to file different returns depending upon the sources/type of income. Capital gain on assets is also a form of income on which tax is charged. However, different forms are needed to file ITR capital gains obtained from different sources. In the below blog, you will get to know about the applicability of different forms: ITR-1, ITR-2 & ITR-4 for Capital gains.
Overview
Filing income tax returns (ITR) is an obligatory annual compliance for individuals and entities to fulfill compliance with tax regulations and to assess their financial standing. Around 7 ITR forms have been provided by the Income Tax Department for filing ITR depending upon the sources and nature of income. Out of all 7 ITR Forms, ITR-1, ITR-2, and ITR-4 are widely used by taxpayers having different sources of income including capital gains to file ITR. These three ITR forms play a significant role in reporting capital gains. In this blog, we’ll discuss different uses of filing ITR-1, ITR-2, and ITR-4 for capital gains.
ITR-1
ITR-1, also known as Sahaj, is a kind of primary form for filing your income tax return. This ITR form can be filed by individuals making income of up to Rs. ₹50 lakh in a year from salaries, one house property, and a few other sources (except winnings from lottery and racehorses). However, capital gain in ITR1 can’t be solely used to file it. This is the reason, individuals with capital gains from the sale of assets or investments such as stocks, mutual funds, etc. must also choose other ITR capital gains forms.
Capital gains are classified into two categories: Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG). No separate ITR capital gain forms are required to report these capital gains; though there may be a slight variation in the documentation & process of ITR filing for capital gains.
Uses of ITR-2 for Capital Gains
Individuals and Hindu Undivided Families (HUFs) with income from sources other than business or profession are eligible to file ITR-2. ITR-2 for capital gain is one of the essential forms for reporting capital gains from the sale of capital assets like property, stocks, mutual funds, real estate, and so on. The primary uses of Form ITR-2 for capital gain are described below:
- Reporting Capital Gains: Taxpayers can provide their capital gains details earned during the financial year by using Schedule CG of ITR-2 form. It also includes gains from short-term as well as long-term investments, along with relevant exemptions and deductions.
- Calculating Capital Gains Tax: Taxpayers can calculate their tax liability on capital gains accurately using this form. The tax rates charged on capital gains vary from short-term to long-term. The taxpayers can also take benefits of exemptions and indexation to minimize their tax burden.
- Disclosing Foreign Assets & Income: People having foreign assets or income are also needed to use ITR-2 for providing details of such assets to the Income Tax Department. A few such other income includes capital gains on foreign assets, dividends, or rental income from overseas properties.
- Claiming Foreign Tax Credit: Any individual who has paid taxes on his foreign income has the right to claim a tax credit in India for the taxes he had paid in abroad. ITR-2 filing capital gains has a section to claim these kinds of foreign tax credits to help taxpayers avoid paying double or unnecessary taxation.
ITR-4
ITR-4 which is also known as Sugam, is designed for individuals, Hindu Undivided Families (HUFs), and firms (other than LLPs) with presumptive income from business or any profession. While ITR-4 primarily caters to business income, it can also be used for reporting capital gains but under certain conditions, which go as:
Uses of ITR-4 for Capital Gains:
- Small-scale Investors: Individuals or HUFs engaged in small-scale trading or investment activities, where the capital gains form a minor part of their total income, can file ITR-4 capital gains. This form facilitates the tax filing process by consolidating all income sources in a single form.
- Limited Capital Gains: Taxpayers with limited capital gains, such as occasional stock trading or property transactions, can opt for ITR-4 for capital gains if their total income falls within the prescribed limits for this form.
- Presumptive Taxation: ITR-4 provides taxpayers the benefit of choosing presumptive taxation under Section 44AD or 44ADA. It mainly applies to the business income, it can also indirectly affect the taxation of capital gains earned from the same business.
Choosing the right ITR form is necessary for accurate and efficient tax filing, especially when it comes to reporting capital gains. Form ITR-2 for capital gains is the designated form for providing the details of capital gains. However, taxpayers with common investment portfolios or business activities may find Form filing ITR-4 capital gains more feasible.
Get to know more about the complexities associated with different forms of ITR capital gains as it will help ensure compliance with tax regulations and thus, maximize tax efficiency for individuals and entities alike.
FAQs
Q1: How to declare capital gains in ITR?
In the case of long-term capital gains, taxpayers have to give their scrip-wise information while filing ITR 2 capital gains. It includes ISIN, selling price, purchase price, date of different transactions, and more. Taxpayers need to click on ‘Add’ after providing their details through ‘Schedule 112A’.
Q2: What is the difference between ITR 1 and ITR 2 capital gains?
Choosing the right ITR Form mainly depends on your source of income. In the case of a salaried person, you ought to file ITR-1 for capital gains. But if you also have capital gains along with salary, you need to file ITR-2 capital gains Form.
Q3:How do you show capital gains on ITR-2?
If the capital gain is more than Rs 1 Lakh in a financial year, then the excess amount shall be taxable at the rate of 10%. In order to report long-term capital gains/losses on listed equity shares, units of equity-oriented mutual funds, or units of business trust, selecting Schedule 112A form is required.
Q4: How can I calculate my capital gains tax?
The following methods should be followed to calculate capital gains tax:
- Long term capital gain= Final Sale – (indexed cost of acquisition+indexed cost of improvement+cost of transfer)
- Index cost of Acquisition= Cost of Acquisition x cost inflation index of the year of transfer/cost inflation of the year of acquisition.
Q5: What is the capital gains tax on property in ITR?
Presently, the long-term capital gain on property is calculated at a 20% tax rate with some additional cess and also surcharge rates if applicable. In case of short-term capital gain from a property is charged at the normal tax slab rate.