How to File ITR for Short-term/Long-term Capital Gains in India?

According to the Income Tax Act, if you earn profit by selling any asset, whether property or equity, it is termed capital gains. Capital gains are taxed differently than individuals; they are taxed based on the nature and holding period of the asset classes.   

Here are the details if you want to understand how to declare capital gains in ITR for salaried individuals, businesspersons, and F&O traders in a stipulated financial year.

A capital gains tax is levied on the profit generated after the sale of a capital asset.  

As per the Income Tax Act 1961, if the shares held by the taxpayer are for investment purposes, they will be considered capital assets and taxed as capital gains.   

However, if the taxpayer buys and sells shares regularly in a relatively short period, it will be taxed as business income. 

Capital gains are divided into short-term or long-term capital gains (STCG and LTCG) based on the holding period.

Taxpayers need to select a relevant schedule for reporting capital gains in ITR for taxation to be correct.  

The long-term capital gains from equity-oriented mutual funds are reported in ‘Schedule 112A’ and the short-term capital gains are reported in Schedule CG.

If you have made capital gains from salary income, business, or Futures and Options (F&O) trading in India, and you want to file an Income Tax Return (ITR), follow these detailed steps to file capital gains in your ITR:

• Step 1: Determine the type of capital gains

You need to determine the type of capital gains you have made - short-term capital gains (STCG) and long-term capital gains (LTCG).  

• Step 2: Calculate the capital gains

You need to calculate the capital gains you made. To calculate the STCG, you need to deduct the cost of acquisition, expenses incurred for trading, and any losses from the sale price of the F&O contracts. For LTCG, you need to deduct the indexed cost of acquisition, expenses incurred for trading, and any losses from the sale price of the F&O contracts.

• Step 3: Report the capital gains in the appropriate ITR form  

You need to report the capital gains made under all the heads in the appropriate ITR form. If you have only made capital gains from F&O trading, you can use ITR-3 or ITR-4 forms. ITR-3 is for individuals and Hindu Undivided Families (HUFs) with income from business or profession, and ITR-4 is for individuals and HUFs with income from a presumptive business.

• Step 4: Fill out the relevant ITR form

Fill out the ITR form with the required details. In the Schedule CG (Capital Gains) section of the ITR form, provide the details of the F&O contracts sold during the financial year. You need to provide details such as the name of the company or index, the number of contracts sold, the date of purchase and sale, the sale price, the cost of acquisition, the expenses incurred for trading, and the net gains or losses.

• Step 5: Pay tax on the capital gains

Calculate the tax payable on the capital gains trading based on your income tax slab. You can claim deductions on expenses incurred for trading and carry forward any losses from previous years. Pay the tax due before filing the ITR.

• Step 6: File the ITR  

File the ITR online through the income tax e-filing website. Attach the necessary documents such as Form 16, capital gains statement, and bank statements. Once the ITR is successfully filed, you will receive an acknowledgement from the income tax department.

Which ITR Form for Salary and Capital Gains?

Individuals and HUFs with income from sources other than those under ‘Profit and Gains from Business or Profession’ must fill ITR-2 to file ITR for salary and capital gains.

Disclosures for Salaried Individuals under Capital Gains Schedule

Since FY 2021-22 (AY 2022-23), taxpayers need to provide the following additional disclosures under the Capital Gains Schedule:

• Acquisition and transfer dates of building/land.

• Details of cost of improvement, year of improvement and indexed cost of improvement.

• Separate disclosures pertaining to cost and indexed cost of acquisition.

• If the property is located in a foreign country, then the country and zip codes.

Which ITR Form for Business Income and Capital Gains?

If a taxpayer generates income through a proprietary business or a profession, including accountancy, architecture, medical, engineering, etc., and has capital gains, you must file ITR-3 for income tax returns.

Disclosures for Businesses under Capital Gains Schedule

Since FY 2022-23 (AY 2023-24), the following additional disclosures are required when filing returns under the Capital Gains Schedule:

• Amount of cash deposits in excess of ₹1 crore in the current bank account. 

• Expenditure incurred by the individual on foreign travel exceeding ₹2,00,000

• If the taxpayer incurs more than ₹1,00,000 on electricity charges 

• If an individual earns short or long-term capital gains by selling a building and/or land, he/she must furnish some details of this sale. These details include a taxpayer’s PAN or Aadhaar information, residential address, and percentage share of ownership.

• A separate schedule 112A calculates the long-term capital gains on the sale units of a business liable to STT or equity shares.  

• If a taxpayer holds the position of a company’s director or has unlisted equity investments, the ‘Type of Company’ must be disclosed. 

• An individual must provide details of tax deduction claims for expenditures, payments, or investments made between 1st April 2022 to 30th June 2023.

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If you make income from futures and options (F&O) trading, including intra-day trading, your earnings and capital gains will come under business income while filing ITR.   

Taxpayers need to declare capital gains under the Capital Gain Schedule in the ITR form, properly mentioning if they are short-term or long-term capital gains.

Which ITR Form for Capital Gains from Trading?

ITR-3 is the applicable capital gains ITR form for traders whose income would be declared under the head ‘profits and gains from business or profession’. Individuals have to pay tax based on the slab rate applicable.  

However, if you chose to pay tax under the presumptive taxation scheme and declared profits at 6% of the total turnover, then you must file ITR-4.   

Which ITR Form for Losses from F&O Trading?

In case you have losses from F&O trading, you have to file ITR-3, as only then you will be able to adjust and carry forward the losses to the next financial year.

What are the Tax Audit Requirements for F&O Trading?

Tax audit is required for F&O trading accounts if the turnover is more than ₹10 crores (digital transactions are 95% or more). 

However, if you have opted for a presumptive taxation scheme and declare an income lower than the presumptive income, your total taxable income from all heads exceeds the maximum tax exemption amount, then it is mandatory to do a tax audit.

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Section 54 of the ITA allows taxpayers to claim tax exemption on the capital gains. While reporting the gains under business income allows deduction of associated expenses, including broker’s commission, demat charges, cost of research reports, depreciation of devices used for F&O trading purposes, and internet costs.