ITR-1 opens up for AY 2026-27: long-term capital gains under section 112A up to Rs 1.25 lakh can now be reported

For years, a salaried taxpayer who sold even one equity mutual fund unit was pushed out of the one-page ITR-1 Sahaj form and into the longer ITR-2. That changed for Assessment Year (AY) 2026-27. Per the Income Tax Department's ITR-1 (Sahaj) FAQ published on incometax.gov.in, ITR-1 can now be filed by a resident individual whose total income is up to Rs 50 lakh and who has long-term capital gains (LTCG) under section 112A of up to Rs 1.25 lakh. The same revision also lets ITR-1 filers report income from up to two house properties, where earlier only one was permitted.

This is a genuine simplification for small investors, but it is bounded by a hard number: Rs 1.25 lakh. Cross that line by even one rupee and ITR-1 is off the table again. This guide walks through what section 112A says, a worked example at a realistic salary, the mistakes the department flags in scrutiny, and the questions readers ask most.

What the Section Says

Section 112A of the Income-tax Act, 1961 governs the taxation of long-term capital gains on listed equity shares, units of equity-oriented mutual funds and units of a business trust, provided Securities Transaction Tax (STT) has been paid. Under the current law, the first Rs 1.25 lakh of such gains in a financial year is exempt, and the balance is taxed at a flat 12.5% without the benefit of indexation.

Those figures are recent. Budget 2024 raised the exemption from Rs 1 lakh to Rs 1.25 lakh and lifted the rate from 10% to 12.5% with effect from 23 July 2024. So for the whole of FY 2025-26 (which feeds into AY 2026-27), the Rs 1.25 lakh exemption and the 12.5% rate apply to every 112A transfer, with no split-date arithmetic to worry about. You can read the statutory language on indiacode.nic.in and the definition of long-term capital gains in our glossary.

The ITR-1 change is a form-eligibility change, not a tax change. The Rs 1.25 lakh exemption exists regardless of which form you file. What is new is that a resident individual whose only capital-gains item is 112A LTCG of Rs 1.25 lakh or less no longer needs ITR-2 to declare it. The Income Tax Department's ITR-1 (Sahaj) FAQ on incometax.gov.in states the eligibility plainly: total income up to Rs 50 lakh, one or two house properties, and 112A LTCG capped at Rs 1.25 lakh.

A few boundaries matter. ITR-1 still cannot carry short-term capital gains under section 112A / 111A on equity, which are taxed at 20% since 23 July 2024 and require ITR-2. It cannot carry LTCG under section 112 (property, gold, unlisted shares). And it cannot be used at all by a non-resident, by a director in a company, or by anyone holding unlisted equity shares. The table below summarises what fits inside ITR-1 for AY 2026-27.

Worked Example

Consider Rohit, a resident salaried employee in FY 2025-26 with a gross salary of Rs 14,00,000 who redeemed equity mutual fund units held for more than 12 months, booking a long-term gain of Rs 90,000. Because Rs 90,000 is below the Rs 1.25 lakh section 112A exemption, the entire gain is exempt and there is no capital-gains tax on it. Since the gain is under Rs 1.25 lakh and his total income is under Rs 50 lakh, Rohit can now file ITR-1 rather than ITR-2 for AY 2026-27.

Under the new tax regime for FY 2025-26, Rohit claims the Rs 75,000 standard deduction, bringing his salary income to Rs 13,25,000. His LTCG of Rs 90,000 is fully exempt and is reported for disclosure only, so his taxable total income stays at Rs 13,25,000. The table below shows the slab tax on that figure using the FY 2025-26 new-regime slabs.

Adding the 4% health and education cess of Rs 3,150, Rohit's total liability is Rs 81,900. Because his taxable total income of Rs 13,25,000 exceeds the Rs 12,00,000 threshold, the section 87A rebate of up to Rs 60,000 does not apply. You can reproduce this with our income tax calculator and compare regimes with the old vs new regime tool.

Now change one number. Suppose Rohit's long-term gain had been Rs 1,60,000 instead of Rs 90,000. The first Rs 1,25,000 stays exempt; the remaining Rs 35,000 is taxed at 12.5%, giving Rs 4,375 plus 4% cess of Rs 175, so Rs 4,550 of capital-gains tax. Crucially, because the gain of Rs 1,60,000 exceeds Rs 1.25 lakh, Rohit can no longer use ITR-1 at all and must file ITR-2 for the whole return. Model the gain itself with our capital gains calculator.

Common Mistakes

The first and most common error is treating the Rs 1.25 lakh figure as a tax-free allowance you can keep booking while still filing ITR-1. It is not. The exemption is Rs 1.25 lakh, but the ITR-1 gate is also Rs 1.25 lakh, and the moment your total 112A LTCG for the year touches Rs 1,25,001 you must switch to ITR-2, even though only the excess above Rs 1.25 lakh is actually taxed at 12.5%.

The second mistake is confusing short-term with long-term. Gains on listed equity held for 12 months or less fall under section 111A and are taxed at 20% since 23 July 2024. ITR-1 does not accommodate section 111A short-term gains at all for AY 2026-27, so a taxpayer with even Rs 5,000 of equity STCG must file ITR-2. Our glossary explains the short-term capital gains boundary in detail.

The third mistake is expecting the section 87A rebate to wipe out tax on the 112A gain. For FY 2025-26 the new-regime rebate under section 87A is up to Rs 60,000 for a taxable total income up to Rs 12,00,000, but that rebate is not available against tax computed at the special 12.5% rate on 112A long-term gains. Assuming otherwise leaves a shortfall that surfaces as a demand notice.

A fourth error, flagged repeatedly in ITR scrutiny, is under-reporting because the gain looked exempt. Even a fully exempt 112A gain of, say, Rs 90,000 must be disclosed in the return; the Annual Information Statement (AIS) already carries the mutual fund and broker data, and a mismatch between the AIS and a blank capital-gains schedule is a standard trigger for a section 143(1) adjustment. Reconcile your figures against the AIS on incometax.gov.in before filing.

The fifth mistake is claiming indexation on equity. Section 112A is a no-indexation regime; the 12.5% rate applies to the plain difference between sale value and cost. Indexation survives only for certain section 112 assets acquired before 23 July 2024, not for listed equity under 112A.

FAQ

Can I file ITR-1 for AY 2026-27 if I have any capital gains at all?

Only if your capital gains are long-term gains under section 112A and they do not exceed Rs 1.25 lakh for the year, per the Income Tax Department's ITR-1 (Sahaj) FAQ on incometax.gov.in. Any short-term equity gain under section 111A, any section 112 gain on property or gold, or 112A gains above Rs 1.25 lakh pushes you to ITR-2.

Is the whole Rs 1.25 lakh of gain tax-free?

Yes. Under section 112A the first Rs 1.25 lakh of eligible long-term equity gains in a financial year is exempt, and only the amount above Rs 1.25 lakh is taxed at 12.5% without indexation, following the Budget 2024 change effective 23 July 2024.

What if my 112A gain is exactly Rs 1.25 lakh?

A gain of exactly Rs 1,25,000 is fully within the exemption, carries no capital-gains tax, and keeps you eligible for ITR-1, since the FAQ permits 112A LTCG of "up to Rs 1.25 lakh". At Rs 1,25,001 you owe 12.5% on Rs 1 and must move to ITR-2.

Does the two-house-property change help me?

Yes. For AY 2026-27 ITR-1 accepts income from up to two house properties, up from one previously. A taxpayer with a self-occupied home and one let-out flat, whose total income is within Rs 50 lakh, can now use ITR-1 provided no other disqualifying income exists.

Can a non-resident use this relaxed ITR-1?

No. ITR-1 (Sahaj) is only for resident (and ordinarily resident) individuals. A non-resident, a resident but not ordinarily resident, a company director, or a holder of unlisted equity shares must use a different return form regardless of the size of the 112A gain.

Do I still need to report an exempt gain in the return?

Yes. Even a gain fully covered by the Rs 1.25 lakh exemption must be disclosed. The Annual Information Statement on incometax.gov.in already reflects your equity and mutual fund transactions, and omitting a matching disclosure is a common cause of section 143(1) intimations.

Where can I check the exact ITR-1 rules?

The authoritative source is the ITR-1 (Sahaj) FAQ under e-filing services on incometax.gov.in, and the statutory text of section 112A is available on indiacode.nic.in. Verify both before filing, as form eligibility is revised each assessment year.