ITR 1, ITR 2, ITR 3 or ITR 4: Which form to select for income tax return?

After we discussed as to who can use ITR 1 in the article last week, let now see who can use ITR 2, ITR 3 and ITR 4. The discussion is with restricted to Individual and HUF only.

Also Read: Income tax return: Who can use ITR 1, who cannot?

Who can use ITR 2

So ITR 2 is next to ITR 1 in simplicity and ease of filling up.  Since HUF cannot use ITR 1 they can use ITR 2 in all the cases where individuals are eligible to use ITR 1. ITR 2 can be used by all those persons who are not eligible to use ITR 1 and their source of income does not have any business or professional income. So you cannot use ITR 1 if you are a director or have unlisted shares or even if you own more than one house or have agricultural income over Rs. 5,000/- as long as you do not have any income whether taxable under whether profit or loss under the head “Profits and Gains of Business or profession. You can use ITR 2 if you are a non-resident or being a resident have any asset or interest in asset outside India or even have an authority to sign any bank account outside India if there is no business income. All those who have income from other sources and who wish to claim any expenditure under the head “Income from other Sources” can use ITR 2. Those who have dividend income and have borrowed money to make such investments can use ITR 2 if they wish to claim expenditure in respect of interest paid on money borrowed for purchasing such shares. Please note you are allowed to claim interest upto 20% of the amount as dividends even if actual interest cost incurred for the year is higher than 20% of the aggregate of dividends received by you. 

For all those who either have brought forward losses which they wish to set off against current year’s income or those who have losses under these head for the current year and wish to carry forward the same for set off during subsequent years can also use ITR 1 as they cannot use ITR 1. 

So to say it in one line all the individuals and HUFs who do not have any income under the head “Business or profession” and who cannot use ITR 1 are eligible to use ITR 2. Since incomes includes loss also you cannot use ITR 2 if you have incurred any loss in your business howsoever small the amount.  Majority of people are under the impression that profits made by them on trading of shares and commodities can be offered under the head “Income from other Sources” as they are not engaged in business as they do not have proper business set up. In my opinion this is not correct and such transactions amount to business activity and one has to use either ITR  3 or ITR 4. 

Eligibility to use ITR 3

This is the most complicated ITR form for individuals and HUFs.  In my opinion it is difficult for a layman to fill up this form by himself without committing any mistake. As far as eligibility to use ITR 3 is concerned, it is simple. You have to use ITR  3 if you are an individual or an HUF engaged in any business or profession, income and who are disqualified from using ITR 4. Moreover even if you are offering your business or professional income on presumptive basis and your taxable income exceeds Rs. 50 lakhs or you have income under the head “Capital Gains”, you have to use ITR 3 only. 

Form ITR 4 

ITR 4, known as Sugam, can be used by any individual, HUF or a partnership firm which wishes is eligible to offer its income on presumptive basis. Under presumptive scheme of taxation a taxpayer is presumed to have earned a minimum income expressed as percentage of gross receipts of business or profession or as a fixed amount based on number of commercial vehicles owned. Please note that though a partnership can use ITR 4 if it is eligible for presumptive taxation but an LLP is not eligible to use ITR 4. This form can only be used by a person who is resident for income tax purposes. So a non resident cannot use it even if his income is below 50 lakhs and has income taxable on presumptive basis. In case you are director in any company or own shares in any unlisted companies you cannot use ITR 4. 

Likewise, if you have any income under the head “Capital gains” or “Income from other sources” other than interest and family pension or have income from source outside India, you cannot use ITR 4 and you have to use ITR 3 where you have option to offer your income on presumptive basis.

In case your actual business or professional income is lower than that was is presumed by law, you cannot use ITR 4 and you have to use ITR 3 and in which case you have to get your accounts audited and get the report it submitted to the income tax department before submission of the ITR.  

I am sure with both these articles, you have fair idea of which ITR form is to be used by you.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter