"Taxpayers with income from shares, mutual funds, crypto, ESOPs, or derivatives often incorrectly use ITR-1 instead of ITR-2 or ITR-3."
As the income-tax return (ITR) filing season for financial year (FY) 2025-26, or assessment year (AY) 2026-27, begins, taxpayers should review the latest ITR forms.
Choosing the wrong form could lead to defective returns, delayed refunds, or tax notices.
Key Points
- New ITR forms for AY 2026-2027 expand ITR-1 eligibility by allowing reporting of up to two house properties.
- Taxpayers with foreign assets, unlisted shares, higher capital gains or trading income must avoid using simplified ITR-1.
- ITR-3 applies to taxpayers with business, professional, trading or complex income structures beyond presumptive taxation provisions.
- Choosing the wrong ITR form may trigger defective return notices, delayed refunds and possible invalidation of filed returns.
- Experts advised taxpayers to carefully review income sources including crypto, ESOPs and freelance income before filing returns.
Key ITR form changes
One key change in the new ITR forms for AY 2026-2027 is the expanded eligibility for ITR-1.
Earlier, resident individuals with income up to Rs 50 lakh from salary, one house property, other sources, long-term capital gains (LTCG) under Section 112A up to Rs 1.25 lakh, and agricultural income up to Rs 5,000 could file the simplified form.
The revised ITR-1 allows taxpayers to report two house properties.
It also seeks additional details such as co-ownership percentage and tenant information.
"The new forms also introduce a separate field for secondary address in the personal information schedule," says Neeraj Agarwala, senior partner, Nangia & Co LLP.
"The capital gains schedule has been simplified to reflect applicable tax rates.
"Donation disclosure requirements have been tightened.
"Schedule 80G now requires UPI or bank transaction reference numbers and IFSC details, while Schedule 80GGC mandates disclosure of the political party's name and PAN," adds Agarwala.
Who can use ITR-1 and ITR-4
Resident individuals with income up to Rs 50 lakh from salary, pension, up to two house properties, interest income, agricultural income up to Rs 5,000, and LTCG under Section 112A up to Rs 1.25 lakh can use ITR-1.
"Taxpayers must shift to ITR-2 if they have higher capital gains, foreign assets, directorships, or unlisted shares," says Agarwala.
ITR-3 is mandatory for those with business or professional income beyond presumptive limits, including futures and options trading income.
Who cannot file ITR-1
ITR-1, also known as Sahaj, is the simplest ITR form.
It is primarily meant for salaried individuals with relatively straightforward income profiles.
Taxpayers cannot file ITR-1 if they are company directors, hold unlisted shares, own foreign assets, earn income abroad, have signing authority in a foreign account, or if their total income exceeds Rs 50 lakh.
"The form is also not applicable for those with short-term capital gains, taxable long-term capital gains under Section 112A above Rs 1.25 lakh, carried-forward losses, deferred employee stock ownership plan (ESOP) tax liability, or tax deduction under Section 194N," says Preeti Sharma, partner, global employer services, tax & regulatory services, BDO India.
In such cases, taxpayers must file more detailed forms such as ITR-2 or ITR-3.
If salaried individuals also have business, professional, freelancing, consultancy, trading, F&O, or partnership income, ITR-3 becomes applicable.
"In simple terms, salaried individuals with investments usually move to ITR-2, while those with business or trading income must file ITR-3," says Sharma.
Choosing between ITR-3 and ITR-4
The choice between ITR-3 and ITR-4 depends on whether the taxpayer opts for the presumptive taxation scheme under Sections 44AD, 44ADA, or 44AE.
ITR-4, or Sugam, is meant for small businesses, freelancers, and professionals with simpler income structures who opt for presumptive taxation and do not maintain detailed books of account.
Professionals with gross receipts up to Rs 75 lakh under Section 44ADA may use this route.
"ITR-3 applies where taxpayers maintain books of accounts, have higher turnover, declare lower profits than presumptive limits, want to carry forward losses, face tax audit, or have complex business, consultancy, trading, or multiple income streams.
"In practice, taxpayers should choose based on both turnover and the complexity of their income and reporting requirements," says Sharma.
Consequences of choosing wrong form
Filing the wrong ITR form can lead to the return being treated as defective, especially if it results in incorrect income reporting or non-disclosure of assets.
The Income Tax Department may issue a notice under Section 139(9), usually giving taxpayers 15 days to correct the defect by filing the appropriate ITR form and responding through the income-tax portal.
"Taxpayers can rectify the error voluntarily if the return is marked defective on the portal.
"If corrected within the prescribed timeline, the return remains valid; otherwise, it may be treated as invalid, as if no return was filed," says Sudhakar Sethuraman, partner, Deloitte India.
Avoid these common mistakes
Taxpayers often continue with the same form used in earlier years without considering changes in income or investments.
"Taxpayers with income from shares, mutual funds, crypto, ESOPs, or derivatives often incorrectly use ITR-1 instead of ITR-2 or ITR-3.
"Similarly, freelancers and consultants may wrongly report professional income as salary or other income, though it should generally be reported under business or professional income through ITR-3 or ITR-4," says Sethuraman.
Dos and don'ts for choosing ITR form
Dos
- Review all income sources, including salary, capital gains, freelance income, rent, crypto, ESOPs, and foreign assets.
- Check eligibility and disqualification conditions for each ITR form.
- Seek professional advice if you have multiple income streams or foreign transactions.
Don'ts
- Don't ignore small transactions like crypto trades, capital gains, or consultancy income.
- Don't misclassify income to fit a simpler ITR form.
- Don't overlook disclosure-related conditions such as company directorships or unlisted shareholdings.
Source: Deloitte India
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Feature Presentation: Ashish Narsale/Rediff
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