Filing tax returns with wrong ITR form can invalidate and delay process

The Central Board of Direct Taxes (CBDT) has notified the key Income Tax Return (ITR) forms for the financial year 2024-25 (assessment year 2025-2026), allowing taxpayers to file their returns. Salaried individuals should consider both their income level and sources beyond salary when selecting the appropriate ITR form. 

“The correct ITR form depends on the type and quantum of income, losses incurred, type of investments made, foreign assets, and so on,” says Naveen Wadhwa, vice-president, Taxmann. 

Who should go for ITR-1 

Resident individuals may use ITR-1 if their total income is within ₹50 lakh and comes from salary or pension. They should have income from only a single house property, interest from savings accounts or fixed deposits, and similar investments. Agricultural income must not exceed ₹5,000. “For the first time, taxpayers earning long-term capital gains (LTCG) up to ₹1.25 lakh on equity shares and units of equity-oriented mutual funds (MFs), where securities transaction tax (STT) has been paid, can also file ITR-1,” says Vivek Jalan, partner, Tax Connect Advisory Services LLP. 

Who should choose ITR-2 

Individuals with taxable income above ₹50 lakh, more than one house property, or capital gains subject to tax (if long-term capital gains exceed ₹1.25 lakh or any other capital gains arise) must use ITR-2. Non-resident Indians (NRIs) must also use ITR-2. 

“A taxpayer also needs to file ITR-2 if he is a director in a company, holds unlisted shares, or has assets, financial interests, or income outside India. Taxpayers having stock options where taxation benefit is deferred, or who have brought forward losses also need to file ITR-2,” says Aarti Raote, partner, Deloitte India. 

Who should file using ITR-3 

Salaried individuals with freelancing or professional income must use ITR-3. “Even a tax professional could make YouTube videos and earn professional income from it. They should file using ITR-3,” says Jalan. 

Reporting rental, dividend, capital gains 

Each ITR form contains schedules for reporting various income types. “Rental income is reported in Table B2 of Part B of ITR-1 and Schedule HP (House Property) in ITR-2 and ITR-3. Dividend income is reported in Table B3 of Part B of ITR-1 and Schedule OS (Other Sources) in ITR-2 and ITR-3,” says Wadhwa. 

An investor having crypto income as capital gains can disclose it in ITR-2.  “If the tax payer reports it as business income, then ITR-3 may be used,” says Raote. 

Select ITR form carefully 

Using the incorrect ITR form has serious consequences. “The return filed could be treated as defective, invalid, or even be considered as not filed at all,” says Deepak Kumar Jain, founder and chief executive officer, TaxManager.in, the tax advisory and e-filing portal of Rising Advisory Services. 

The tax department, on detecting this error, issues a defective return notice under Section 139(9), which is sent to the taxpayer’s registered email and is also available on the e-filing portal. If the notice is received before the filing deadline, taxpayers may file a fresh or revised return. “The taxpayer can also respond to the notice, rectifying the highlighted errors. If the deadline for revising the return has lapsed, then responding to the defective return notice is the only option,” says Jain. 

He informs that failure to respond within the prescribed timeline can lead to penalties, interest charges, and loss of eligible refunds. A return can be revised up to three months before the end of the relevant assessment year, or before the assessment is completed, whichever is earlier. 

Preparations before filing tax returns

  *  Prepare a comprehensive list of your income from all sources

  *  Gather all relevant documents and financial details

  *  Cross-check your reported income against Form 26AS and the Annual Information Statement (AIS)

  *  Select the appropriate ITR form applicable to your income profile