ITR1 vs ITR2: Meaning, Applicability, Components and their Key Differences

Overview : Choosing the right ITR form can help taxpayers ensure compliance with their tax obligations. Depending upon the nature and type of Income, the selection of an ITR form may vary from one taxpayer to another. New taxpayers are often confused when choosing the correct ITR form, ITR 1 or ITR 2. Though these two ITR forms may look quite similar, they have minor differences and differentiate their applicability. Explore this blog to gain a comprehensive know-how of the difference between ITR 1 and ITR 2, their applicability, and more.

Tax filing is a crucial obligation for individuals whose total income exceeds the basic exemption limit for tax filing and therefore, they must file their income tax returns. Selection of the right and accurate income tax return filing is essential to ensure compliance and avoid penalties. As a taxpayer, if you fail to do so, the Income Tax department/authorities can reject your return and even charge a hefty penalty for improper filing or not choosing the correct form. Learn about the two most important income tax return filing forms, ITR 1 and ITR 2, with their differences and other crucial aspects.

What is ITR-1?

ITR 1, also referred to as Sahaj, is a simplified income tax return form primarily designed for individual taxpayers whose income sources are salary, pension, single house property, and other sources like interest income. It is suitable for resident individuals whose total Income does not exceed ₹50 lakh. This form does not apply to individuals with Income from more than one house property, capital gains or foreign Income. This form offers a feasible option for taxpayers with straightforward income sources, ensuring easier tax compliance and efficient filing of income tax returns.

Who Should File ITR-1?

ITR 1, or Sahaj, is tailored for individual taxpayers whose income source is salary, pension, single house property, and other sources such as interest income. It is specifically designed for resident individuals whose total Income does not exceed ₹50 lakh. However, this form is not suitable for those who make Income from sources such as multiple house property, capital gains, or any foreign income. Therefore, individuals with common income sources and no complex financial situations must choose the ITR 1 form to ensure easy tax compliance and filing of income tax returns.

What are the Key Components of ITR 1 Form?

ITR 1 is an important tax filing form, and it comprises various crucial components. The components have a crucial role in taxpayers' income filing and claiming deductions. The key sections and components of ITR 1 are described below;

• Part A - General Information : This section consists of personal details such as name, address, PAN, and filing status.
• Part B - Gross Total Income : Here, taxpayers report Income from salary, pension, one house property, and other sources like interest income.
• Part C - Deductions and Taxable Income : This section helps taxpayers claim deductions under various sections of the Income Tax Act, such as 80C, 80D, etc., and calculate the taxable Income.
• Part D - Computation of Tax Payable : This section consists of calculating the total tax liability based on the taxable Income and applicable tax rates.
• Part E - Other Information : It mainly consists of details about advance tax self-assessment tax and taxes that have been paid.

These ITR 1 components help taxpayers offer a clear and comprehensive overview of their financial situation, and thus, allow the income tax department to assess taxes accurately.

Applicability of ITR 1

If it comes to the applicability of Income Tax form ITR 1, salaried Resident individuals having an income up to Rs. 50 lakh within a financial year, need to choose the ITR 1 form while filing their returns. Some common criteria for the applicability of ITR 1 are as follows;

• Sources of Income should be salary or pension.
• Income should be from a single property.
• The Income can be from Other Sources (excluding activities like horse racing, gambling, lotteries and more.)
• A person should not own any property outside India.
• The person should not receive any revenue from foreign countries.
• An individual who has interest income from SB, Deposits, and other Interest Income
• Income from Family Pension

Who is not eligible to file ITR 1?

Taxpayers are not eligible to file form ITR 1 under certain conditions; those conditions are described below;

• Taxpayers having Residential Status- Non-Resident and Resident but not ordinarily Resident.
• If a taxpayer's total income exceeds Rs. 50 lakhs.
• In cases where an individual taxpayer receives Income from Other Sources (including activities, i.e. lotteries, gambling, horse racing, and games, etc.).
• If an individual has incurred losses under Income from Other Sources.
• If a person has capital gains (Long/Short term).
• If an individual's Income from agriculture is more than Rs 5,000.
• If an individual has invested in unlisted equity shares.
• If a person is a director in a company.
• If an individual has deferred income tax on ESOP received from the employer being an eligible startup.

After exploring the vital aspects of filing ITR-1 form, let’s move forward to learn about different aspects of filing form ITR-2 to have a clearer understanding of this income tax return filing form.

What is ITR 2?

ITR 2 is designed specifically for individuals and Hindu Undivided Families (HUFs) who do not have Income from business/profession. It is suitable for those who earn Income from salary, multiple house properties, capital gains, foreign Income, and agricultural Income exceeding ₹5,000. Additionally, ITR 2 is applicable for individuals with Income from investments in unlisted equity shares or foreign assets. This form allows taxpayers to report a more comprehensive range.

Who Should File ITR 2?

ITR 2 is specifically introduced for individuals and Hindu Undivided Families (HUFs) whose sources of income are not business or profession. It is suitable for those whose Income includes salary, multiple house properties, capital gains, foreign Income, and agricultural Income exceeding ₹5,000. Individuals with Income from investments in unlisted equity shares or foreign assets are also required to file ITR 2.

This income tax form is ideal for taxpayers with more complex financial situations and diverse income sources, ensuring comprehensive tax compliance and accurate filing of income tax returns.

Filing ITR 2 is necessary for individuals with foreign source income, or those who hold financial interest in foreign entities, or have Income from a business trust. This form is also applicable on those who make Income from long-term capital gains or have carried forward losses from previous financial years.

Applicability of ITR 2

Taxpayers are required to choose ITR 2 under certain conditions. Those conditions for applicability of form ITR 2 are listed below;

• Taxpayers who are not eligible to file ITR-1.
• If a taxpayer has Income from salary/pension.
• If they have Income from more than one house party.
• If they have Income from Other Sources (including horse racing, card games, lotteries, gambling, etc.)
• If the taxpayer has capital gains (Long-term and short-term)
• If an individual has an agricultural income of more than Rs 5,000 within a financial year.
• Taxable Income exceeding Rs 50 lakhs.
• If an individual has brought forward losses from the previous financial year.
• If he/she is a director in a company.
• If an individual has property or assets in the foreign nation (s)
• Taxpayers who want to claim DTAA benefits or relief under section 90/91.
• Any person who has invested in unlisted equity shares.
• A Person has deferred income tax on ESOP received from an employer being an eligible start-up.

Who is not eligible to file ITR-2?

Similar to ITR-1, some specific individuals are not eligible to file ITR-2. Some categories of taxpayers who can't file ITR-2 are as below;

• Taxpayers (individual or HUF) who have Income from business or any profession can't file ITR.
• Entities like Companies/Firms and Trusts are not eligible to file ITR 2 or ITR 1.

What are the Key Components of ITR 2 Form?

The ITR 2 form consists of several sections that address various aspects of a taxpayer's Income and deductions. Key sections include:

• Part A - General Information : This section requires personal details such as name, address, PAN, and filing status, along with residential status and relevant assessment year.
• Part B - Gross Total Income : Taxpayers report Income from salary, multiple house properties, capital gains, foreign Income, and other sources like interest income.
• Part C - Deductions and Taxable Income : This section helps taxpayers to claim deductions under different sections of the Income Tax Act, such as 80C, 80D, etc.

Key Differences Between ITR-1 & ITR-2

ITR-1 and ITR-2 forms are designed to serve taxpayers of different categories based on their income sources and financial complexities. The primary distinction lies in the type of Income each form caters to. ITR-1 is designed for individual taxpayers with straightforward income sources such as salary, pension, one house property, and other sources like interest income, with a total income not exceeding ₹50 lakh. It is not suitable for those with income from more than one house property, capital gains, or foreign income.

On the other hand, ITR-2 is meant for individuals and Hindu Undivided Families (HUFs) who don't have Income from business or profession but have more diverse income sources. This includes income from salary, multiple houses or more than 1 house property, capital gains, foreign Income, and agricultural Income if exceeding ₹5,000. It is also useful for individuals who invest or have invested in unlisted equity shares or have foreign assets. In short, ITR-2 is ideal for those with complex financial situations and a comprehensive range of income sources.

Which form should be filed to declare dividend income: ITR 1 or ITR 2?

When the yearly dividend income of an individual exceeds Rs 5,000, the Tax Deducted at Source (TDS) of 10% is applicable. If the dividend income is from the shares held for business purposes, then it's required to file it under the head Income from Business or Profession. In cases where the shares were held for the intention of investment, the returns would be taxable under head Income from Other Sources.

As per their conditions, mainly sources of income, taxpayers can choose which ITR form is suitable for them; either ITR 1 or ITR 2.

CONCLUSION

Choosing the right form type to file your returns is crucial. With the right ITR form selection, a taxpayer can easily file their income tax returns within the specified time and thus can keep penalties at bay. Understanding the applicability and differences of forms ITR 1 and ITR 2 can help you file your returns properly. Explore the complete article to develop a deeper knowledge of ITR 1 vs ITR 2 income tax forms and ensure better filing and avoiding tax related penalties.

Author Bio

Editorial Team | in

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.