ITR-1 vs. ITR-2: As the income tax return filing season arrives, most salaried individuals opt for ITR-1 (Sahaj form) without much thought. While it is indeed the simplest form, one should not choose it solely because it is easy to fill out.
According to Mumbai-based Chartered Accountant Suresh Surana, if you have engaged in any transactions involving the stock market, property, or foreign assets during the year, you become ineligible to file ITR-1. In such cases, you must choose either the ITR-2 or ITR-3 form. Selecting the wrong form could lead the Income Tax Department to issue a notice regarding a 'defective return.' Let us look at the 10 scenarios where filing ITR-1 is not permitted.
Filing ITR-1 is prohibited in these 10 cases; you must choose ITR-2 or ITR-3 instead:
1. Short-Term Capital Gains (STCG) from selling shares or mutual funds
If you have sold shares or equity mutual funds within one year of purchase and realized a short-term capital gain, you cannot file ITR-1. You must select the ITR-2 form for this.
2. Long-Term Capital Gains (LTCG) exceeding ₹1.25 lakh
If you have realized long-term capital gains exceeding ₹1.25 lakh in a financial year under Section 112A from the sale of listed shares or equity-oriented mutual funds, the option to file ITR-1 is no longer available to you.
3. Sale of land, house, or gold
If you have sold any property (land or building), jewelry, or debt mutual funds, the income generated from such sales must be reported under the 'Capital Gains Schedule,' which is not available in ITR-1. Filing ITR-2 is mandatory in this instance.
4. Income from Business or Profession
If you earn income from freelancing, consultancy, a profession, or your own business, you cannot choose ITR-1. In such cases, you must file ITR-3, unless you are eligible to file ITR-4 under the presumptive taxation scheme.
5. F&O and Intraday Trading
Income or losses arising from intraday trading or trading in Futures and Options (F&O) in the stock market are treated as business income. This cannot be reported in ITR-1 either.
The form required will also change in these situations (beyond just salary income):
6. Investment in Unlisted Shares
If you hold shares in a company that is not listed on the stock market, you are not eligible to file ITR-1 at any point during the year.
7. Holding the Position of a Director
If you serve as a director in any company—whether small or large—you cannot use ITR-1. You must file either ITR-2 or ITR-3.
8. Foreign Assets or Foreign Bank Accounts
If you own property outside India, hold shares in a foreign company (such as US stocks), or possess signing authority over a foreign bank account, you must fill out the detailed 'Schedule FA' in other forms instead of using ITR-1.
9. Any Income from Abroad
If you receive income from abroad—such as salary, dividends, interest, or rent—it cannot be reported in ITR-1. For this, you are required to fill out Schedule FSI and Schedule TR along with ITR-2 or ITR-3.
10. Income Exceeding ₹50 Lakh or Brought-Forward Losses
If your total annual taxable income exceeds ₹50 lakh, you cannot file ITR-1. Additionally, ITR-1 is not applicable if you have any carried-forward losses you wish to set off this year, or if you have earned income from special categories such as lotteries or horse racing.
Expert Advice: What happens if you choose the wrong form?
Tax experts state that selecting the correct ITR form is just as important as filing your return on time. If you inadvertently choose the wrong form, your return will be deemed 'defective'; this can delay your refund and may require you to file a 'revised return'. Therefore, be sure to review all your financial transactions before filing.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
