Determine the suitable ITR form for your situation: Accurate reporting of capital gains is essential
In the upcoming Assessment Year 2025-26, the Income Tax Return (ITR) utilities have undergone significant updates. To avoid potential pitfalls, it's essential to exercise caution when selecting the ITR form, accurately report gains, and thoroughly review all schedules.
Key Changes in ITR Forms for AY 2025-26
- The threshold for reporting assets and liabilities in Schedule AL under ITR-2 and ITR-3 has been raised from Rs 50 lakh to Rs 1 crore.
- Additional schedules for deductions under Sections 80C, 80E, 80EE, 80EEA, and 80EEB have been introduced for the declaration of respective details.
- A new schedule has been introduced for reporting home loan interest deductions under Section 24(b), mandating disclosure of lender details and loan particulars.
- A dropdown-based disclosure interface has been added for reporting exempt receipts under Section 10(13A) (House Rent Allowance) and deductions under Sections 80C to 80U.
- A new row is inserted in ITR-2 and ITR-3 for reporting capital loss on buyback of share and respective deemed dividend income.
- In the case of House Rent Allowance (HRA), individuals must now specify whether their place of work is in a metro or non-metro city, as this affects the calculation of eligible exemption.
Selecting the Appropriate ITR Form
The choice of ITR form depends on the nature and amount of income. Here's a breakdown:
- ITR-1 can be used if your LTCG under Section 112A is up to ₹1.25 lakh and you do not have other complex incomes such as business or professional income, or capital gains above this limit. ITR-1 is mainly for small taxpayers with simple income sources like salary, one house property, and exempt LTCG up to this threshold.
- If your LTCG exceeds ₹1.25 lakh or you have any short-term capital gains (STCG), you cannot use ITR-1. Instead, you must use ITR-2 or ITR-3, which accommodate reporting of capital gains beyond the exempt limit and allow detailed disclosure in Schedule CG and Schedule 112A.
- ITR-3 is to be used if you have income from a business or profession, along with capital gains and other incomes.
Reporting Long-Term Capital Gains (LTCG) and Other Income Sources
- If you have LTCG (any amount) and income from business or profession, you must use ITR-3.
- If you have LTCG exceeding ₹1.25 lakh or have any STCG, you cannot use ITR-1 and must use ITR-2 or ITR-3.
- Taxpayers must correctly report LTCG in Schedule CG, with gains bifurcated based on the date of transfer before and on/ after July 23, 2024, due to revised tax rates introduced for AY 2025-26.
Other Important Considerations
- Those with foreign assets or income must file ITR-2 or ITR-3 to report the same under Schedule FA.
- Taxpayers choosing the old tax regime will now face enhanced disclosure requirements for claiming deductions.
- Neglecting to maintain proper documentation of asset sales or inconsistencies between Form 26AS/AIS and the return can trigger compliance issues.
Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm, emphasized the importance of these precautions.
Deadline for Filing Income Tax Returns
The deadline for filing income tax returns is September 15, 2025.
In conclusion, before filing, carefully assess your LTCG amount, type of other income, and foreign asset/income holdings to choose between ITR-1, ITR-2, and ITR-3 for AY 2025-26. For LTCG exceeding ₹1.25 lakh under Section 112A or having STCG, ITR-2 is typically appropriate unless you also have business income, in which case choose ITR-3. ITR-1 is reserved for straightforward cases with exempt LTCG within the exemption limit.
- Given the increased reporting requirements in Schedule AL for assets and liabilities in the upcoming Assessment Year 2025-26, it is important for individuals to understand the impact of the rising threshold from Rs 50 lakh to Rs 1 crore on their personal finance and tax obligations.
- As the Finance Market adjusts to the introduction of more detailed schedules for deductions under various sections such as 80C, 80E, 80EE, 80EEA, 80EEB, and 24(b), DEFI (Decentralized Finance) users may need to reassess their tax reporting strategies for personal-finance management in the new tax regime.
- The integration of dropdown-based disclosure interfaces for reporting exempt receipts and deductions under Sections 10(13A) and 80C to 80U could potentially impact the accuracy and efficiencies of the Income Tax Return filing process, benefiting both taxpayers and the economy.
