Income Tax Department notifies ITR forms 1, 2, 3, 4 and 5 – Which one should taxpayers use?

Taxpayers can now file their returns for the recently concluded financial year using several forms notified recently by the Central Board of Direct Taxes. The Income Tax Department has officially released ITR Forms 1 to 5 over the past fortnight — with the other documents expected in the coming days. Several changes have been introduced this year with the eligibility and requirements changing significantly in certain cases.

Different tax returns are prescribed for filing by individual taxpayers depending on their income and its source as well as factors such as residential status.

Who can use ITR-1?

The simplified form is designed for individuals and entities who earned up to Rs 50 lakh during the recently concluded financial year. Following the changes notified by the Central Board of Direct Taxes this week, individuals who have accrued long-term capital gains upto Rs 1.25 lakh within a financial year are also eligible to file the user-friendly application rather than the more complicated ITR-2.

Who can use ITR-2?

ITR 2 form can be filed by individuals or HUFs who do not have income under the head of profits and gains of business or any profession. Individuals and HUF with income exceeding Rs 50 lakh in a financial year should file this form.

Who can use ITR-3?

TR-3 is filed by individuals and HUFs having income from profits and gains of business or profession. The threshold for reporting assets and liabilities under ‘Schedule AL’ has been raised from Rs 50 lakh to Rs 1 crore this year — reducing the disclosure burden on middle-income taxpayers. The recent updates also allow individuals or HUFs who purchased houses before July 23, 2024 to opt for payment of Long Term Capital Gain tax under the new scheme at the rate of 12.5% without indexation or claim the indexation benefit and pay 20% tax.

Who can use ITR-4?

Individuals, HUFs and firms (excluding Limited Liability Partnerships or LLPs) can file ITR-4 if they earn below Rs 50 lakh during the financial year. It is also applicable if their income is computed presumptive basis under Sections 44AD, 44ADA or 44AE of the Income Tax Act.

Who can use ITR-5?

ITR-5 is applicable for firms, LLPs, AOPs and BOIs. 

The income tax department highlighted various changes, one of the most notable revisions in ITR Form 5 is the introduction of a split within the Schedule-Capital Gain. This new structure mandates taxpayers to report capital gains before and after July 23rd, 2024.The form now allows the reporting of capital loss incurred on share buybacks. However, this allowance is conditional upon the corresponding dividend income from these buybacks being declared as “income from other sources,” particularly for transactions occurring after October 1st, 2024.Furthermore, ITR Form 5 has a new addition of a specific reference to the section 44BBC of the Income Tax Act. Another key update is the requirement to specify the Tax Deducted at Source (TDS) section code within Schedule-TDS.