PROSPERR.IO

Filing your income tax return shouldn't be guesswork. But every year, thousands file the wrong ITR form and wonder why their return gets rejected.

The problem isn't complicated once you understand it. India has multiple ITR forms ITR-1 through ITR-7. Each is designed for specific taxpayers with particular income sources. Use the right one, your return sails through. Use the wrong one, you're looking at defective return notices.

For individuals, the choice comes down to four forms: ITR-1, ITR-2, ITR-3, and ITR-4. Which applies depends on your income sources, residential status, earnings, foreign assets, director status, and more.

Let's break down exactly how to figure out which form you need for AY 2024-25 (income earned in FY 2023-24).

The Four Main ITR Forms for Individuals

1. ITR-1 (Sahaj): The simplest form. For resident individuals with straightforward salary income, one house property, and other income up to ₹50 lakh.
2. ITR-2: For individuals and HUFs not having income from business or profession. Covers most people who don't qualify for ITR-1.
3. ITR-3: For individuals and HUFs having income from business or profession.
4. ITR-4 (Sugam): For resident individuals, HUFs, and firms opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE.

There are also ITR-5, 6, and 7, but those are for specific entities like firms, companies, and trusts. As an individual, you won't need them.

ITR-1: The Most Common Form

ITR-1 is what most salaried people with simple finances use. But it has strict eligibility criteria.

You can use ITR-1 if:

• You're a resident individual (not NRI or RNOR)
• Total income is up to ₹50 lakh
• Income sources are only: salary, one house property, other sources (interest, family pension, etc.)
• Agricultural income is up to ₹5,000
• You don't have any business or professional income
• You don't have capital gains (from shares, property, mutual funds)
• You don't have income from lottery, racehorses, or legal gambling
• You're not a director in any company
• You don't have assets outside India (foreign accounts, property)
• You haven't held any unlisted equity shares at any time during the year

Common ITR-1 scenario: Earning ₹8 lakh as salary, own a self-occupied house (no rental income), have ₹40,000 interest from savings account and fixed deposits. Total income ₹8.4 lakh. Resident Indian. No other complications.

Perfect fit for ITR-1.

When You Cannot Use ITR-1

Cannot use ITR-1 if:

• Income exceeds ₹50 lakh
• You're NRI or RNOR
• More than one house property
• Capital gains or losses (even exempt)
• Business or professional income
• Director in any company
• Foreign assets or income
• Unlisted equity shares held during the year
• Brought forward losses
• Income from lottery/racehorses

Any of these? You need ITR-2, ITR-3, or ITR-4.

ITR-2: For More Complex Situations

ITR-2 covers what ITR-1 doesn't. It's for individuals and HUFs who don't have business or professional income but have income sources that make them ineligible for ITR-1.

Use ITR-2 if:

• Income exceeds ₹50 lakh from salary/house property/other sources
• You're an NRI or RNOR
• You have capital gains or losses (shares, property, mutual funds)
• You own more than one house property
• You're a director in a company
• You have foreign assets or foreign income
• You have income from lottery, racehorses, etc.
• You held unlisted equity shares during the year
• You have losses from previous years to carry forward

ITR-2 scenario: Salary ₹12 lakh, sold shares during the year with ₹80,000 long-term capital gains (even though exempt under Section 112A), own two flats (one rented), also a director in a startup (even if not drawing salary from it).

Cannot use ITR-1 because: income exceeds ₹50 lakh, capital gains, more than one house, and company director. Must use ITR-2.

ITR-3: When You Have Business or Professional Income

ITR-3 is for individuals and HUFs with income from business or profession. This includes freelancers, consultants, traders, sole proprietors.

Use ITR-3 if:

• You have income from business or profession
• You're a partner in a firm
• You're a professional (CA, doctor, lawyer practicing independently)
• You do freelance or consultancy work
• You trade in shares regularly (as business, not investment)

ITR-3 scenario: Salary ₹6 lakh from job, plus ₹3 lakh from freelance consulting work. The consulting income is professional income.

Must use ITR-3 even though the salary component could have fit ITR-1. The presence of professional income disqualifies ITR-1 and ITR-2.

ITR-4: The Presumptive Taxation Option

ITR-4 is specifically for those using presumptive taxation schemes. These schemes allow you to declare income at a presumed percentage of turnover without maintaining detailed books.

Use ITR-4 if:

• You're a resident individual, HUF, or firm
• You're opting for presumptive taxation under Section 44AD (business), 44ADA (profession), or 44AE (goods carriage)
• Total income doesn't exceed ₹50 lakh
• No other income except what's allowed under these sections

Section 44AD: For small businesses with turnover up to ₹2 crore (₹3 crore if all receipts are digital). Presume 6% of digital turnover or 8% of cash turnover as income.

Section 44ADA: For specified professionals (medical, legal, engineering, architecture, accountancy, technical consultancy, interior decoration) with gross receipts up to ₹50 lakh. Presume 50% as income.

ITR-4 scenario: Running a small retail shop. Turnover ₹80 lakh in FY 2023-24, all digital transactions. Under Section 44AD, declare 6% (₹4.8 lakh) as income. No need to maintain detailed books.

Use ITR-4 for simplified reporting.

Selection Decision Tree

Common Mistakes in Form Selection

1. Using ITR-1 when income exceeds ₹50 lakh: The cap applies regardless of income type. Salary ₹55 lakh? Must use ITR-2.
2. Ignoring capital gains: Sold shares with ₹20,000 exempt LTCG? Still disqualifies ITR-1. Must use ITR-2.
3. Forgetting director status: Unpaid director in a startup? Disqualifies ITR-1. Must use ITR-2.
4. Confusing ITR-3 and ITR-4: Using presumptive taxation? ITR-4, not ITR-3.
5. Not declaring unlisted shares: Held startup ESOP shares? Disqualifies ITR-1 even if not sold.

What Happens If You File the Wrong Form

Return gets processed but marked defective. You receive Section 139(9) notice pointing out the defect. Have to file again in correct form.

If the wrong form omitted income or details, could lead to additional tax demands or scrutiny. Better to get it right first time.

Special Situations and Which Form Applies

• NRI with only salary: Use ITR-2 (ITR-1 restricted to residents)
• Sold house property: Capital gains transaction, use ITR-2
• Two houses (one vacant): More than one property, use ITR-2
• Received ₹2L gift from non-relative: Taxable gift under other sources; ITR-1 works if total income under ₹50L and no other disqualifiers
• Trading stocks as business: Use ITR-3 (or ITR-4 if using presumptive)
• Partner in firm: Share of profit from firm, use ITR-3
• Agricultural income ₹8,000: Exceeds ₹5,000 limit, use ITR-2

How to Verify Your Selection

Before filing:

1. List all income sources for FY 2023-24
2. Check residential status (resident/NRI based on days in India)
3. Calculate total income—exceeds ₹50 lakh?
4. Special checks: Director? Foreign assets? Unlisted shares? Multiple properties?
5. Match against form criteria—start with ITR-1, move to ITR-2/3/4 if disqualified.

Where to Find the Forms

All ITR forms are on the e-Filing portal (incometax.gov.in). When filing, the portal suggests which form might apply. Verify independently.

You can download offline utilities (Excel/Java-based), fill offline, generate XML, upload.

Third-party platforms (ClearTax, QuickBooks, etc.) also guide form selection.

Final Checklist Before Filing

• Total income calculated
• All income sources identified
• Residential status determined
• Director status checked
• Unlisted shares holding confirmed
• Number of house properties verified
• Foreign assets/income checked
• Agricultural income confirmed
• Business/professional income reviewed
• Presumptive taxation applicability determined
• Brought forward losses reviewed

All checks done? Match your situation against form criteria. Uncertain? ITR-2 is safest covers everything ITR-1 does plus more.

Key Takeaway

• Form selection isn't about convenience. It's about compliance with specific criteria. ITR-1 is the simplest but most restrictive. One disqualifying factor and you can't use it.
• When in doubt, choose the more comprehensive form. Filing ITR-2 when you could have filed ITR-1 is fine. Filing ITR-1 when you should have filed ITR-2 is a problem.
• Match your situation against the checklist. Complex situation? Consult a CA for first filing. Getting the form right is the first step—everything else comes after.

Book a free tax assessment call with us now!

Frequently Asked Questions

Q1: Income is ₹48 lakh from salary, ₹3 lakh from rent (one house property), total ₹51 lakh. Which form—ITR-1 since each component is under ₹50 lakh, or ITR-2 since total exceeds ₹50 lakh?

ITR-2. The ₹50 lakh limit for ITR-1 applies to total income, not individual components. Your total income is ₹51 lakh, which exceeds the cap. Even though income sources (salary and one house property) would otherwise qualify for ITR-1, the total income exceeding ₹50 lakh disqualifies you. File ITR-2.

Q2: Bought and sold shares multiple times during the year but total capital gains were ₹8,000 (all exempt LTCG). Since the amount is small and exempt, can ITR-1 be used or is ITR-2 mandatory?

ITR-2 is mandatory. The presence of capital gains—regardless of amount or whether exempt—disqualifies you from using ITR-1. Even ₹1 of capital gain (or loss) means you cannot use ITR-1. You must report the exempt capital gains in ITR-2 under the exempt income schedule. Filing ITR-1 in this situation would make it a defective return.

Q3: Working as a salaried employee but also did some freelance graphic design work earning ₹1.2 lakh during the year. Total income ₹9 lakh. Which form?

ITR-3. The freelance graphic design work is professional income. Presence of professional income makes you ineligible for both ITR-1 and ITR-2. You must use ITR-3 even though the professional income is relatively small compared to salary. Report salary under "Income from Salaries" and freelance income under "Profits and Gains of Business or Profession" within ITR-3. If your freelance income qualifies for Section 44ADA presumptive taxation (gross receipts under ₹50 lakh), you could alternatively use ITR-4, but most people with mixed salary+professional income use ITR-3.

Q4: Resigned from a company in July 2023 where I was a salaried director. For the rest of FY 2023-24, just had regular salary from a new company (non-director role). Was a director for only part of the year. Does that still disqualify from ITR-1?

Yes, disqualified from ITR-1. The disqualification applies if you were a director in any company at any time during the financial year, even for a day. Being a director for part of the year still triggers this condition. You must use ITR-2. This applies whether you received director's remuneration or not. The status itself is the disqualifying factor, not the income from it.

Q5: Have a savings account in the US from when I used to work there. Currently working in India as a resident. Account has minimal balance and earned just $50 interest. Do I need to use ITR-2, or can I use ITR-1 since the foreign income is negligible?

Must use ITR-2. Having a foreign asset (the US bank account) disqualifies you from ITR-1 regardless of the account balance or income from it. ITR-2 has schedules for reporting foreign assets (FA) and foreign income (FSI) which ITR-1 doesn't have. Even if the account is dormant or has zero balance, if it existed at any time during FY 2023-24, you need to report it in ITR-2. The asset value and income amount don't matter for determining form eligibility—the presence of foreign assets itself is the trigger.