Many taxpayers who sold listed shares or during FY26 and earned less than ₹1.25 lakh in long-term capital gains (LTCG) believe they can skip filing their income tax return (ITR) because no tax is payable on such gains. Tax experts, however, say this is one of the most common misconceptions around capital gains taxation.
The confusion stems from the ₹1.25 lakh exemption available under Section 112A of the Income-tax Act. While the provision exempts eligible equity LTCG up to ₹1.25 lakh from tax, it does not determine whether a taxpayer is required to file an ITR. The filing requirement depends on a person’s total income and the applicable provisions of the Income-tax Act.
“There is no rule which says that if your long-term capital gains are below ₹1.25 lakh, you don’t have to file an income tax return,” says Balwant Jain, tax and investment expert. “The ₹1.25 lakh limit is only for calculating tax on long-term capital gains. Whether you need to file an ITR depends on your overall income.”
How the ₹1.25 lakh exemption actually works
Long-term capital gains arising from the sale of listed equity shares and equity-oriented mutual funds are taxed under Section 112A. The first ₹1.25 lakh of such gains in a financial year is exempt from tax, while gains exceeding this amount are taxed at the prescribed rate.
However, resident taxpayers can also benefit from the basic exemption limit if their total income is low.
Jain explains this with an example.
Suppose a resident individual has ₹5 lakh of long-term capital gains from listed shares and no other income during the financial year.
The first ₹1.25 lakh is exempt under Section 112A, leaving ₹3.75 lakh of taxable gains. Under the old tax regime, the basic exemption limit for an individual below 60 years is ₹2.5 lakh. Since the remaining income exceeds this limit, tax would effectively apply only on ₹1.25 lakh.
“The basic exemption limit is available to resident individuals. After reducing the ₹1.25 lakh exemption, the remaining income is compared with the applicable basic exemption limit,” Jain explains.
He cites another example where an individual has only ₹2.5 lakh of long-term and no other income.
After claiming the ₹1.25 lakh exemption, the balance comes down to ₹1.25 lakh, which is below the old regime’s basic exemption limit of ₹2.5 lakh. In such a case, there is no tax liability.
Does no tax mean no ITR?
Not necessarily.
According to Jain, taxpayers often confuse tax liability with the requirement to file an income tax return.
“If your total income is below the applicable basic exemption limit, filing an ITR may not be mandatory. But if your total income exceeds the basic exemption limit, you have to file a return, even if your long-term capital gains are below ₹1.25 lakh and no tax is payable on those gains,” he says.
For instance, consider a salaried employee earning ₹11 lakh during FY26 who also books ₹1 lakh of long-term capital gains from listed shares. Since the capital gains are below ₹1.25 lakh, they are exempt from tax. However, the employee must still file an ITR because the salary income itself exceeds the applicable basic exemption limit.
Similarly, a taxpayer earning ₹1 lakh of LTCG and ₹5 lakh as salary under the new tax regime cannot skip filing simply because the capital gains are tax-free. Although the LTCG is exempt, the overall income crosses the basic applicable under the new regime.
The key takeaway
The ₹1.25 lakh exemption under Section 112A is only a tax exemption on eligible long-term capital gains from equities. It should not be interpreted as an exemption from filing an income tax return.
Whether an ITR has to be filed depends on a taxpayer’s total income, the applicable basic exemption limit, and other mandatory filing conditions under the Income-tax Act.
For investors, the distinction is important. No tax on LTCG does not automatically mean no ITR. Before deciding to skip return filing, taxpayers should assess their overall income rather than relying solely on the amount of long-term capital gains earned.