Income Tax Return Filing: ITR 1, ITR 2, ITR 3 or ITR 4 – How to select the right ITR form

Published: July 7, 2020 1:38 PM

Selecting the appropriate Form is only the starting point of the tax return filing process and taxpayers have to ensure compliance with other requirements as well.

 ITR Form select, choose, ITR 1, ITR 2, ITR 3, ITR 4, tax return filing, form 26as, sahajIt is also pertinent to use the correct ITR Form so that the disclosures are made and penal consequences are not triggered.

By Divya Baweja and Radhika Viswanathan

The start of a tax year marks the beginning of many timelines with the filing of return of income occupying a prime spot. As much as tax return filing is the bounden duty of every taxpayer, it is also pertinent to use the correct Form so that the requisite disclosures are made and penal consequences not triggered. Selecting the appropriate Form is only the starting point of the tax return filing process and taxpayers have to ensure compliance with other requirements as well.

For the tax year ended 31 March, 2020, there are seven notified tax return Forms (ITRs 1 to 7) that taxpayers can use to file their return of income, depending on what applies to them. The return Forms have been designed to capture information based on the category that a person falls into (individual with or without business /professional income, HUF, company, etc.), residential status of a taxpayer and so on.

ITR 1, more commonly referred to as ’SAHAJ‘, is to be used by individuals who qualify as ‘ordinarily resident’ during a tax year (1st April to 31st March). However, there are additional checks one has to do before selecting ITR 1, which relate to the level of total income (upto Rs 50 lakhs and agricultural income upto Rs 5,000) and type of income (salaries, income from one house property and other sources such as interest). The taxpayer should not be a director in a company or have investments in the nature of unlisted equity shares.

If any of the above conditions are not satisfied, the taxpayer cannot use ITR 1 and has to use ITR 2 provided there is no business / professional income. Individuals and HUFs with business or professional incomes can file their returns using ITR 3 designed to capture details of the profit and loss of the business / profession, besides the balance sheet values.

There is also a dedicated return Form for taxpayers using the presumptive tax methodology wherein the tax percentages are fixed in relation to income. This category of resident taxpayers (being individuals, HUFs and firms other than Limited Liability Partnerships) can use ITR 4 provided their total income is less than or equal to Rs 50 lakhs. These individuals should also not be directors in companies nor should they have invested in unlisted equity shares.

Once the correct tax return Form is identified, it is important to bear certain issues in mind before filing the tax return; the key are summarised below:

a. Mapping income and taxes

Having selected the type of tax return Form, the next step would be to collate the information/documentation required for completing the same. While we all would have compiled details of the income earned during the tax year, it is important to match these with that reported to the tax department.

For this, it is important for a taxpayer to download his/her Form 26AS from the Income tax portal and verify the income and tax deduction reported therein. This is an important step as any mismatch in the income/taxes between the data available with the tax department (reflected in Form 26AS) and that reported in the tax return can trigger a notice from the authorities.

If any discrepancy is noted in the income or tax deducted, it would be advisable to contact the payer of the income and have the issue sorted before filing the tax return so that this does not cause a challenge at a later date.

Henceforth, the data being captured in Form 26AS will also include details of specified financial transactions such as purchase / sale of property, investments, expenses, loans or deposits, outstanding demands/refunds, pending assessment.

While some of these are more procedural, details of specified financial transactions are intended to provide all information at one place to taxpayers and the authorities; hence, it is important that the relevant sources of income are correctly mapped in the return of income.

b. Interchangeability of PAN and Aadhaar

In line with the announcement made by the Finance Minister, taxpayers can now file their returns using Aadhaar number if they do not have a PAN. The government has also enabled instant PAN allotment using Aadhaar, should one prefer that route.

Additionally, Aadhaar number can be provided in the absence of PAN in certain sections of the tax return (such as details of co-owner/tenants in the house property schedule, buyer of immovable property for capital gains). As a result, absence of PAN should no longer be an impediment to tax return filing.

c. Asset and liabilities disclosure

If a taxpayer has total income above Rs 50 lakhs, then he/she is required to file the tax return in Form ITR 2 or 3, depending on the nature of income – these two tax return Forms require much more details in comparison to ITR 1.

Nevertheless, a taxpayer has to report the list of assets that he/she holds in India as at 31 March of the relevant tax year along with the associated liabilities. This requirement applies both to resident and non-resident taxpayers and includes immovable as well as movable property (such as vehicles, jewellery, bullion, shares and securities, bank deposits, insurance and cash).

For this purpose, valuation guidelines are prescribed. For example, in the case of vehicles, the value stated in the insurance policy could be used; while for jewellery, the value can be arrived at by using the notified rates.

d. Foreign asset/income reporting

“Ordinarily Resident” taxpayers have to furnish details of assets held overseas and any income earned therefrom. This is applicable even for those who do not have any taxable income as non-furnishing of return attracts a penalty of Rs 10 lakhs.

The assets could be in the nature of land and building, movable assets like vehicles, yachts, jewellery, cash and bank balances, investments in securities or those where the taxpayer has signing authority or is a trustee, etc. it is important to have the acquisition details besides income earned in the year handy prior to working on the tax return. It is also a good idea to check if the income has been taxed in an overseas location so that appropriate foreign tax credit can be availed while paying the taxes and filing the tax return.

e. Additional disclosures

The tax return Forms notified for the year 2019-20 require a taxpayer to provide details of medical insurance premium paid for self, dependents, parents, with further bifurcation into senior citizens and others. In addition, the details of investments qualifying for tax deduction (Chapter VIA deductions) made prior to March 2020 and between April and July 2020, are also required to be disclosed.

The fact that donations made get auto populated based on the returns furnished by the donee, can save taxpayers the hassle of going through individual receipts; however, if the taxpayer has not provided his/her PAN to the donee, then such deduction would not be available.

Directors of companies and taxpayers holding unlisted equity shares need to furnish related information such as name of the entity, DIN, details of acquisition and movement of the shares in their returns.

In summary, it is important for taxpayers to be aware of the requirements of the tax return filing process and comply with the same to minimise any possible questioning from tax authorities. This would help save time and complications at a later date.

(About the authors: Divya Baweja, Partners, Deloitte India and Radhika Viswanathan, Deloitte Haskins & Sells LLP)

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