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Home > Business > Special


Tax: Which ITR form should you use?

Vikas Gandhi | June 21, 2007

Finance Minister P Chidambaram on May 16, 2007, unveiled the new Income Tax Return forms (ITR) for the assessment year 2007-08. Thus the widely accepted and appreciated SARAL-2D and other forms are no longer applicable.

The new forms designed with the intent of being tax friendly, are actually more complex and require assistance of a tax consultant.

However, with increased focus on an annexure-less return filing system and e-filing of returns, the introduction of these forms is justified. It is, hence, necessary for the taxpayer to understand which of these ITR forms is applicable to him.

The new ITR forms

The Income Tax Department has introduced 8 ITR forms numbered ITR1 to ITR8.

There is no confusion in ITR-5, ITR-6, ITR-7 and ITR-8 forms as each of them is applicable to different category of taxpayers. However, form ITR-1 to ITR-4 are applicable to individuals and Hindu Undivided Family (HUF).

The applicability of these forms is based on the taxpayer's sources of income. It is, thus, important to understand the relevance of each of these four forms.

ITR-1:

This form is applicable only to Individuals (and not HUFs), with the below-mentioned source of income:

  • Salary;
  • Interest received (taxable / exempt);
  • Family pension;
  • Agricultural activities.

This is an exhaustive list, and the form is not applicable in following situations:

  1. Any additional source of income (taxable / exempt) other than those mentioned above. Thus, if the taxpayer has dividend income (which is exempt from tax), ITR-1 will not be applicable;
  2. Brought-forward losses from earlier years are to be adjusted;
  3. Clubbing of income (even though such income is only on account of Interest) is applicable.

ITR 1 is, thus, applicable to a limited group of taxpayers. For example, a taxpayer earning salary, with no other income, but paying interest on home loan will not be able to use ITR-1, and will have to use ITR-2.

ITR-2:

This form is applicable to both Individuals & HUFs who have one or more of the following sources of income. In addition, they may have one of the sources of income specified for ITR-1.

  1. Income / loss from house property;
  2. Capital gain / loss on sale of investments / property, etc;
  3. Dividend income (taxable / exempt);
  4. Gifts (taxable / exempt);
  5. Any other income (taxable / exempt), except from business or profession or share of profit from partnership firm;
  6. Income of other person to be included (i.e. clubbing of income);
  7. Brought forward loss of earlier years from house property and/or capital gains.

ITR-3:

This form is applicable to those Individuals and HUFs, who are partners in a partnership firm, in addition to having sources of income applicable to ITR-2. Whether or not income is generated from the partnership is irrelevant.

However, in addition, to being a partner, if the taxpayer is carrying out any business / professional (including speculation) activity, then this form is not applicable.

ITR-4:

This form is applicable, both, to Individuals and HUFs who carry out any business or professional activity in addition to having sources of income applicable to ITR-3.

The above criteria can be summarised through following table:

Applicability Criteria

ITR-1

ITR-2

ITR-3

ITR-4

Based on status of the taxpayer

Individual

Individual & HUF

Based on Income of the Taxpayer

a

Income from Salary / Pension

b

Income / Loss from House Property

c

Carrying out Business / Profession

d

Partner in a partnership firm

e

Capital Gains / Loss on sale of investments / property etc

f

Interest Income (taxable / exempt)

g

Dividend Income (taxable / exempt)

h

Family Pension

i

Gifts (Taxable / Exempt)

j

Casual Income

k

Agricultural Income

k

Other Income (Taxable / Exempt)

l

Income of other person clubbed

m

Unutilized Losses of Earlier years

----- relating to House Property

----- relating to Business Income

----- relating to Speculative Income

----- relating to Depreciation loss

----- relating to Capital Gains

(Note: "�" denotes the special applicability of the form)

The last word

Lastly, the most important point that has to be kept in mind while selecting a form is that if one form is applicable, the taxpayer cannot use any other form. To simplify: If ITR-1 is applicable to the taxpayer, he cannot opt to file the same using ITR-2.

The author is Group Head-Direct Taxes and founder member of Taxsmile.com India Pvt. Ltd. He is a practicing chartered accountant with over 10 years of experience.

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