Understanding Income Tax Return (ITR)
An Income Tax Return (ITR) refers to a declaration submitted to the tax authority containing details of income, deductions, exemptions, and tax payable for a particular financial year. Salaried employees, investors, business owners, and even traders must file an appropriate ITR form. From a financial perspective, ITR forms the building blocks of achieving financial goals and plans.
In this article, we are going to discuss the ITR forms comprising ITR 1, ITR 2, and ITR 3 and we will assist you in selecting the correct form based on your type of income. As an investor or even a salaried employee, knowing the difference between ITR 1 vs ITR 2 and the other forms is important.
What is an Income Tax Return (ITR)?
An Income Tax Return is a return filed every year to the income tax authority detailing the income and taxes paid. In today’s world, paying taxes is mandatory for every individual above a certain level of income. Filing tax returns marks compliance with laws as well as acts as proof of income, which can be beneficial in obtaining loans, visas, and some government aid.
Who Should File an Income Tax Return?
Filing an ITR is compulsory for someone who:
Annual earnings are greater than the basic exemption limit (₹2.5 lakh for individuals over age 60).
Wishes to receive tax reimbursements.
Earn foreign income or possess foreign assets.
Are eligible to carry forward losses.
Engaged in trading, business, or profession.
Types of ITR Forms: ITR 1, ITR 2, and ITR 3
The ITR forms have been classified according to their sources of income as set by the Income Tax Department. Let us examine the structure and significance of each form in detail.
ITR 1 (SAHAJ)
Who Should Use ITR 1?
This form is applicable for:
Individuals with income up to ₹50 lakh
Income from salary/pension
Income from one house property
Income from other sources (excludes lottery or racehorses)
Who Should NOT Use ITR 1?
If you have capital gains
If you own more than one house property
If you have income from a business or profession
If you are a director or hold unlisted shares
ITR 2
Who Should Use ITR 2?
Individuals or HUFs not having income from business or profession
Those with capital gains (sale of shares, property, etc.)
Income from more than one house property
Income from foreign assets or foreign income
ITR 1 vs ITR 2: Key Differences
| Feature | ITR 1 | ITR 2 |
| --------------- | -------------- | ---------------- |
| Income Limit | Up to ₹50 lakh | No limit |
| Capital Gains | Not allowed | Allowed |
| House Property | Only one | Multiple allowed |
| Business Income | Not allowed | Not allowed |
| Foreign Income | Not Allowed | Allowed |
ITR 3
Who Should Use ITR 3
Individuals or HUFs earning from business and professions.
Stock traders reporting speculative/non-speculative income.
Freelancers and professionals (doctors, consultants, etc.)
Those undergoing presumptive taxation under section 44AD/ADA/AE.
Important Points Of ITR 3
Traders are mandatorily required to use this return.
ITR 3 requires a balance sheet and profit & loss statements.
Must declare asset and liability details.
Selecting the Most Appropriate ITR Form: Use Cases
To help with the selection method, let us consider the following:
✔️ Employed Individual with One Property:
No capital gains, no foreign assets.
-> ITR 1
✔️ Multiple Property Owner with Capital Gains
Has more than one property, and also capital gains.
-> ITR 2
✔️ Full-time Trader In Stock Markets
Intraday, F&O speculative income.
-> ITR 3
✔️ Consultant or Freelance Business Taxpayer
Professional income “
-> ITR 3
Implications of Using the Wrong ITR
Choosing the wrong form can lead to processing delays or notices from the IT department. Correct filing shall allow for claiming refunds.
Validate income documents for your financial transactions to be processed.
Uses Fulfilled After Filing Income Tax Returns
✅ Helps maintain a clean legal standing while avoiding issues with the law.
✅ Eases the process of acquiring Loans, Credit cards and visas.
✅ Serves as proof and testimony of income and financial reputation.
✅ Accounts for loss carry forward and adjusts future taxes payable.
✅ Mandatory for fulfillment of foreign asset declaration requirements.
Payment Duration And Penalty Of Late Payment
Payment Period: Usually set to 31st July for individuals.
Penalty for Late Filing: ₹1000 to ₹5000 as stated at Section 234F.
Interest Phase Penalty: Under the realms of Section 234 A/B/C.
Important Notice: Deciding Wisely On Filing Dates
Filing the Tax Return within the given deadline is critical, especially for persons having multiple sources of income such as salary, capital gains, and business income. Choosing the appropriate ITR form out of ITR 1, ITR 2, and ITR 3 based on your income profile will aid in maximising benefits.
10 Most Annoying Questions Related to ITR Filing and Tax Return
- What is the deadline for income tax return filing for FY 2025-26?
Individual due date (non-audit case) is 31st July 2025.
- Can employees use ITR 2?
Yes. However, it is only possible in case they have capital gains, more than one property, or foreign income.
- What is the fine when filing the return past the deadline?
To put it simply, a late fee of up to ₹5,000 is charged under Section 234F.
- I am into stock trading as a hobby. Which ITR should I be using?
You should file ITR 3 in case you opt for trading income as business income.
- Is it mandatory to file ITR for income lower than ₹2.5 lakh?
ITR is not a requirement, but it is recommended to do so if you wish to claim refunds or establish financial records.
- Am I able to change the form of ITR after submitting it?
Not change it, but you can revise the return using the correct form before the due date.
- Is Aadhaar necessary for filing ITR?
For filing ITR, you must link PAN with Aadhaar.
- What happens if I pick an ITR form that I shouldn’t be picking?
Your return may likely be marked defective, and you will be the one receiving a notice to revise it.
- Is it possible to ITR I file without having Form 16?
Not a problem at all, through salary slips, bank statements, and other income proofs.
- Do traders need to maintain books of account?
Yes, traders filing ITR 3 are required to maintain books of accounts if their turnover crosses the set thresholds.
