ITR 1 vs ITR 2: Which One to File for ITR FY 2023-2024, AY 2024-2025

Tax season can be stressful, especially with the July 31st, 2024 deadline fast approaching. However, choosing the right form to file your income tax return (ITR) doesn’t have to be!

Filing the correct form by the deadline is essential to avoid any penalties. Two of the most common forms used by individual taxpayers are ITR 1 and ITR 2. While both forms cover similar income categories, they have subtle differences. This guide will provide a detailed explanation of the differences between ITR 1 and ITR 2, helping you determine which form best suits your income profile.

What is ITR 1?

ITR 1, also known as SAHAJ, is an income tax return form designed for individual taxpayers with relatively simple income structures. It is primarily used by:

1. Resident Status: You must be a Resident Individual according to the Income Tax Act, 1961. This excludes Non-Resident Indians (NRIs) who cannot file using ITR-1.
2. Total Income Limit: Your total income for the Financial Year (FY) 2023-24 (which is assessed in AY 2024-25) must be up to Rs. 50 lakh. If your income exceeds this limit, you’ll need to explore other ITR forms.
3. Specified Income Sources: Your income must come from the following sources:
4. Salary or Pension: This is the primary source of income that qualifies for ITR-1.
5. Income from One House Property: You can only use ITR-1 if you own and rent out one house property. Income from multiple properties requires a different ITR form.
6. Family Pension Income: Income received as a family pension is also eligible for reporting in ITR-1.
7. Agricultural Income (Up to Rs. 5,000): If your agricultural income is up to Rs. 5,000 for the FY, you can include it in your ITR-1 filing. Higher agricultural income necessitates a different ITR form.
8. Other Sources (with Limitations): You can report income from other sources like:
   1. Interest from savings accounts, deposits (banks, post offices, cooperative societies)
   2. Interest from income tax refunds
   3. Interest received on enhanced compensation
   4. Any other interest income
9. Important Note: Income from lottery, horse racing, or gambling is not allowed in ITR-1.
10. Clubbed Income (if Applicable): You can club the income of your spouse (except for income covered under the Portuguese Civil Code) or minor child with your income, provided their income sources fall within the specified limits mentioned above.

There are certain limitations, that make you ineligible to file using ITR-1 for the Assessment Year (AY) 2024-25:

1. Non-Resident Status:
   • Resident Not Ordinarily Resident (RNOR): Individuals classified as RNOR under the Income Tax Act cannot use ITR-1.
   • Non-Resident Indians (NRIs): NRIs are also ineligible to file using ITR-1.
2. Income Exceeding Limits:
   • Total Income Above Rs. 50 Lakh: If your total income for the Financial Year (FY) 2023-24 (assessed in AY 2024-25) exceeds Rs. 50 lakh, you’ll need to choose a different ITR form.
   • Agricultural Income More Than Rs. 5,000: Income from agriculture exceeding Rs. 5,000 for the FY disqualifies you from using ITR-1.
3. Specific Income Sources:
   • Lottery, Gambling, Horse Racing Winnings: Income from lottery, horse racing, or any form of legal gambling cannot be reported in ITR-1.
   • Taxable Capital Gains: Whether short-term or long-term, capital gains from selling assets are not allowed in ITR-1.
   • Business or Professional Income: If you have income from running a business or profession, ITR-1 is not the appropriate form.
   • Unlisted Equity Share Investments: Individuals who have invested in unlisted equity shares during the FY cannot file using ITR-1.
4. Other Disqualifications:
   • Company Director: If you hold a director’s position in a company, you’re not eligible to use ITR-1.
   • Tax Deduction Under Section 194N: If tax has been deducted under Section 194N of the Income Tax Act (TDS on cash withdrawals exceeding a specific limit), ITR-1 is not applicable.
   • Deferred Income Tax on ESOPs: Individuals with deferred income tax on Employee Stock Option Plans (ESOPs) received from eligible start-ups cannot use ITR-1.
   • Multiple House Properties: Owning and receiving income from more than one house property disqualifies you from using ITR-1.
5. General Ineligibility: If your income profile doesn’t meet the eligibility criteria set for ITR-1, you’ll need to explore other ITR forms.

Types of Income Not Included in ITR-1 Form

While ITR-1 offers a simplified filing process, it has limitations on the types of income you can report. Here’s a breakdown of income that cannot be included in your ITR-1 filing:

1. Business and Professional Income: Profits or gains earned from running a business or practising a profession are not allowed in ITR-1.
2. Capital Gains: Any income generated from selling capital assets, such as stocks, property (except for income from single house property), etc., cannot be reported in ITR-1.
3. Income from Multiple House Properties: If you own and rent out more than one house property, ITR-1 is not the suitable form. You’ll need to use a different ITR form to report income from multiple properties.
4. Specific Types of “Other Sources” Income: ITR-1 allows reporting income from various sources like interest on deposits. However, certain types of income under the “other sources” head are excluded:
   • Lottery Winnings: Winnings from lotteries or any form of gambling cannot be included in ITR-1.
   • Horse Racing Income: Income generated from owning and maintaining racehorses is not allowed in ITR-1.
   • Income Taxed at Special Rates: Income taxable under specific sections of the Income Tax Act, like Section 115BBDA or Section 115BBE (often related to specific types of income or investments), cannot be reported in ITR-1.
5. Income Apportioned Under Section 5A: Income that needs to be divided among several people, as required by Section 5A of the Income Tax Act, cannot be included in ITR-1. This section usually applies to income received by more than one person, like in a partnership.

Documents Required for ITR-1 Filing (Optional)

While ITR-1 is an annexure-less form, meaning you don’t need to attach any documents while filing (electronic or manual), it’s recommended to have certain documents readily available. These documents might be requested by the tax authorities during assessment or inquiry:

What is ITR 2?

ITR-2 stands for Income Tax Return Form 2. It is a form used by individuals and Hindu Undivided Families (HUFs) to file income tax returns when they have income from various sources. ITR-2 is applicable for individuals or HUFs who do not have income from business or profession. It includes and excludes the following: 

No Business Income: The individuals and HUF don’t have income from running a business or profession.

Specific Income Exclusions: There’s no income from:

• Interest
• Salary/Pension
• Bonuses/Commissions
• Partnership firm remuneration

Clubbed Income: The HUF might have income from a spouse, minor child, etc., that needs to be combined with their income, but only if it falls under the excluded categories mentioned above.

However, Individuals or Hindu Undivided Families (HUFs) cannot file ITR 2 for:

• With income from business or profession.
• With income from:
  • Interest
  • Salary/Pension
  • Bonuses/Commissions
  • Remuneration from a partnership firm

Documents Required for ITR-2 Filing

Difference Between ITR 1 and ITR 2

ITR 1 vs ITR 2: Which One to Choose?

Choosing the right Income Tax Return (ITR) form is important for tax filing in India. Here’s a breakdown to help you pick the right one based on your income situation:

ITR 1 (Sahaj):

• Designed for: Resident individuals with relatively simple income and total income up to ₹50 lakh.
• Suitable for:
  • Salaried individuals with minimal additional income (interest, dividends within exemption limits).
  • Individuals owning only one house property (residential or investment).
  • Individuals with agricultural income below ₹5,000.
  • Resident Indians without foreign income or assets.
• Benefits:
  • Simpler form with pre-filled data from Form 16 (salary income) for easier filing.
  • Suitable for most taxpayers with straightforward financial situations.

ITR 2:

• Designed for: Individuals and Hindu Undivided Families (HUFs) with more complex financial profiles or income exceeding ₹50 lakh.
• Suitable for:
  • Individuals owning multiple properties.
  • Individuals with capital gains from selling assets (stocks, shares, property).
  • Individuals with income from a foreign country or holding foreign assets.
  • Individuals with income from lottery, gambling, or horse races (which exceeds exemption limits).
  • Individuals with substantial agricultural income (above ₹5,000).
  • Non-Resident Indians (NRIs).

Key Differences:

The answer to choosing the right form is: 

• Consider your income sources, residential status, and the complexity of your financial activities.
• If your situation is unclear or involves business income, consult a tax advisor for personalized guidance.

How to File ITR 1 Online?

Step 1: Log In

1. Access the e-Filing portal.
2. Enter your user ID and password to log in.

Step 2: Navigate to Filing Section

1. From the Dashboard, go to e-File > Income Tax Returns > File Income Tax Return.

Step 3: Select Assessment Year and Mode

1. Choose the Assessment Year as 2024–25.
2. Select Online as the mode of filing, then click Continue.

Step 4: Continue or Start New Filing

1. If you have a saved return pending submission, click Resume Filing.
2. To start fresh, click Start New Filing.

Step 5: Choose Filing Status

Select the appropriate status and click Continue to proceed.

Step 6: Determine ITR Form

1. If you know which ITR form to file, select it.
2. If unsure, select Help me decide which ITR Form to file and click Proceed. The system will guide you in choosing the correct form.

Step 7: Gather Required Documents

Review the list of necessary documents and click Let’s Get Started.

Step 8: Specify Filing Reason

Choose the reason for filing your ITR and click Continue.

Step 9: Review and Edit Pre-filled Data

1. The New Tax Regime is the default for AY 2024-25, with “No” auto-selected.
2. To opt out, select “Yes” in the Personal Information Section.
3. Check and edit pre-filled data if necessary. Enter any additional required information and click Confirm for each section.

Step 10: Enter Income and Deductions

1. Enter or adjust your income and deductions in the designated sections.
2. Once all sections are completed and confirmed, click Proceed.

Step 10a: Handling Tax Liability

If you have a tax liability, you will see a summary of your tax computation. You can choose Pay Now or Pay Later.

Step 10b: No Tax Liability or Refund Due

If there is no tax liability or you are due a refund, click Preview Return to move to the Preview and Submit page.

Step 11: Process Tax Payment

If you select Pay Now, you will be directed to the e-pay Tax service. Click Continue.

Step 12: Finalize Filing

After successful payment, a success message will appear. Click Back to Return Filing to finish filing your ITR.

Step 13: Preview Return

Click Preview Return.

Step 14: Declaration

On the Preview and Submit Your Return page, tick the declaration checkbox and click Proceed to Preview.

Step 15: Validate Return

Check your return and click Proceed to Validation.

Step 16: Verify Return

After validation, on the Preview and Submit Your Return page, click Proceed to Verification.

Step 17: Complete Verification

On the Complete your Verification page, choose your preferred verification method and click Continue.

Step 18: e-Verify Your Return

On the e-Verify page, select the method for e-Verification and click Continue.

How to File ITR2?

Step 1: Log In

1. Go to the e-Filing portal.
2. Enter your user ID and password to log in.

Step 2: Access Filing Section

Click e-File > Income Tax Returns > File Income Tax Return on your dashboard

Step 3: Select Assessment Year

1. Choose the Assessment Year 2023–24.
2. Click Continue.

Step 4: Select Mode of Filing

1. Choose Online as the mode of filing.
2. Click Continue.

Step 5: Select Filing Status

1. Select the applicable status.
2. Click Continue.

Step 6: Choose ITR Type

1. If unsure which ITR to file, select Help me decide which ITR Form to file and click Proceed. The system will guide you.
2. If you know which ITR to file, select I know which ITR Form I need to file, choose the appropriate form from the dropdown menu, and click Proceed with ITR.

Step 7: Gather Documents

1. Review the list of required documents.
2. Click Let’s Get Started.

Step 8: Review Pre-filled Data

1. Check the pre-filled data and edit if necessary.
2. Enter any additional required data.
3. Click Confirm at the end of each section.

Step 9: Enter Income and Deductions

1. Fill in your income and deduction details in the respective sections.
2. After completing all sections, click Proceed.

Step 10a: If There is a Tax Liability

1. You will see a summary of your tax computation.
2. If there is a tax liability, you will have Pay Now and Pay Later options.

Step 10b: If No Tax Liability or Refund Due

1. If there is no tax liability or if you are eligible for a refund, click Preview Return.
2. You will be taken to the Preview and Submit Your Return page.

Step 11: Process Tax Payment

1. If you selected Pay Now, a pop-up will inform you that you will be redirected to the e-Pay Tax Service for tax payments. Click Continue.

Step 12: Complete Filing

1. After successful payment, a success message will be displayed.
2. Click Return to Filing to complete your ITR filing.

Step 13: Preview Return

Step 14: Declaration

1. On the Preview and Submit Your Return page, enter your location.
2. Select the declaration checkbox.
3. Click Proceed to Preview.

Step 15: Validate Return

1. Preview your return.
2. Click Proceed to Validation.

Step 16: Verify Return

Once validated, click Proceed to Verification on the Preview and Submit Your Return page.

Step 17: Complete Verification

1. On the Complete your Verification page, choose your preferred verification method.
2. Click Continue

Step 18: e-Verify Return

1. On the e-Verify page, choose your preferred e-Verification method.
2. Click Continue

Common Mistakes to Avoid While Filing ITR 1 vs ITR 2

While both ITR 1 and ITR 2 are used for filing Income Tax Returns (ITR) in India, the complexities involved and potential mistakes differ. Here’s a breakdown of things to avoid for each form:

ITR 1 (Sahaj):

• Misunderstanding Eligibility: ITR 1 is for simple income with a maximum limit of ₹50 lakh. Don’t use it if you have complex income sources like capital gains, foreign income, business income, or agricultural income exceeding ₹5,000.
• Missing Pre-filled Data Verification: While ITR 1 comes pre-filled with data (usually from Form 16), double-check its accuracy. Discrepancies can delay processing or lead to notices.
• Incorrect Bank Details: Ensure your bank account details for any potential refund are accurate. Mistakes can delay receiving your refund.
• Exceeding Deduction Limits: Don’t claim deductions beyond permissible limits. Refer to tax regulations for current deduction limits on investments, medical expenses, etc.

ITR 2:

• Choosing the Wrong Form: Don’t use ITR 2 if your income falls under ITR 1’s eligibility criteria. Using the wrong form can lead to your return being rejected.
• Incomplete or Inaccurate Disclosures: ITR 2 requires detailed disclosures. Ensure you report all income sources, including foreign assets or income, capital gains, and income from multiple properties. Missing information can invite scrutiny from tax authorities.
• Incorrect Schedule Filling: ITR 2 has various schedules for specific income sources. Fill them accurately with details like capital gains reports, foreign income details, or proof of agricultural income. Errors in these schedules can lead to tax assessments or penalties.
• Tax Calculation Errors: ITR 2 involves manual tax calculations. Double-check your calculations for income tax, surcharge, and cess to avoid underpayment or overpayment of taxes.

Additional Tips:

• Maintain all supporting documents for verification purposes.
• E-verify your return for faster processing.
• Consider consulting a tax advisor if your situation is complex or you have any doubts.