How to Choose Between ITR 1 and ITR 4 When You Have Interest + Business Income

Choosing the right Income Tax Return (ITR) form is crucial for taxpayers, particularly those who have both interest income and business income. The proper form ensures compliance with the Income Tax Act, preventing potential issues like notices or rejected returns. ITR 1 (Sahaj) and ITR 4 (Sugam) are two of the most commonly used forms, but they cater to different types of income. ITR 1 is designed for individuals with a simpler income structure, including salaries, pensions, and interest income. However, it is not suitable if you have business or professional income. On the other hand, ITR 4 is intended for those with business income under the presumptive taxation scheme (Sections 44AD, 44ADA, or 44AE), and it allows reporting of both interest income and business income. Understanding these differences is essential to ensure that you file the correct form, avoid mistakes, and maximize the benefits available under the Income Tax Act for the Assessment Year (AY) 2025–26.

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Table of Contents

• Understanding ITR 1 and ITR 4

• Key Differences Between ITR 1 and ITR 4

• Which Form to Choose When You Have Interest + Business Income

• Recent Changes for AY 2025-26

• Conclusion

• FAQs

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Understanding ITR 1 and ITR 4

ITR 1 (Sahaj): ITR 1, also known as Sahaj, is one of the simplest forms provided by the Income Tax Department for individuals who have a straightforward income structure. This form is designed for resident individuals (excluding Hindu Undivided Families or HUFs) whose total income does not exceed ₹50 lakh. The form is applicable to individuals earning income from salaries, pensions, one house property, and other sources like interest (excluding winnings from lotteries or racehorses). However, individuals with business or professional income, capital gains, or income from more than one house property are not eligible to file ITR 1. Additionally, this form is not available for company directors, individuals with unlisted equity shares, or those possessing foreign assets. It is meant for those with simple income sources and offers a straightforward filing process.

ITR 4 (Sugam): ITR 4, or Sugam, is more comprehensive than ITR 1 and is intended for individuals, HUFs, and firms (excluding LLPs) whose income is under ₹50 lakh. This form is designed for taxpayers who earn income under the presumptive taxation scheme, which includes businesses and professions under Sections 44AD, 44ADA, and 44AE. ITR 4 allows the reporting of various sources of income, including salary or pension, business income under the presumptive taxation scheme, and interest income. Furthermore, ITR 4 permits the reporting of long-term capital gains (LTCG) from listed shares or equity mutual funds, up to ₹1.25 lakh under Section 112A. However, it is not suitable for those who have income from more than one house property or capital gains from sources other than Section 112A, nor for individuals with foreign assets or income.

Key Differences Between ITR 1 and ITR 4

Criteria	ITR 1 (Sahaj)	TR 4 (Sugam)
Applicability	Individuals (Residents)	Individuals, HUFs, Firms (excluding LLPs)
Income Limit	Up to ₹50 lakh	Up to ₹50 lakh
Business/Professional	Not allowed	Allowed under presumptive scheme (44AD/44ADA)
Interest Income	Allowed	Allowed
Capital Gains	Not allowed (except LTCG ≤ ₹1.25 lakh u/s 112A)	Allowed (LTCG ≤ ₹1.25 lakh u/s 112A)
Number of House Properties	One	One
Foreign Assets/Income	Not allowed	Not allowed
Complexity	Simpler	Slightly detailed (business receipts required)

Which Form to Choose When You Have Interest + Business Income

Interest Income Only:

If your income consists solely of interest (such as from savings accounts, fixed deposits, etc.), and you do not have any business or professional income, ITR 1 is the appropriate form to file, provided you meet all eligibility conditions. ITR 1 is meant for individuals earning up to ₹50 lakh in total income, which includes salary, pension, one house property, and other sources of income, such as interest. However, it is essential that your income does not come from any business or professional activities, nor should you have capital gains or income from more than one house property. If you satisfy these criteria, ITR 1 is a simple and efficient option for filing your return.

Interest + Business Income (Presumptive Taxation):

If you have both interest income and business income under the presumptive taxation scheme (Sections 44AD, 44ADA, or 44AE), you are required to file ITR 4. ITR 4 is mandatory for individuals, HUFs, and firms (other than LLPs) who meet the requirements of presumptive taxation. This form caters to taxpayers who have both interest income and business income, but only if the business income is computed under the presumptive taxation scheme. The form allows you to report income from business activities using simplified methods, and it supports the inclusion of interest income. However, ITR 1 cannot be used in this case, as it does not permit the reporting of business or professional income, even under the presumptive taxation scheme.

Business Income (Non-Presumptive):

If your business income is not under the presumptive taxation scheme, neither ITR 1 nor ITR 4 will be suitable for filing your return. Instead, you must file ITR 3, which is designed for individuals and HUFs with income from a business or profession that does not fall under the presumptive taxation scheme. This form accommodates taxpayers with complex business income scenarios, including those who maintain books of accounts or whose income is not computed on a presumptive basis. Therefore, if your business income exceeds the thresholds defined under the presumptive taxation scheme, ITR 3 is the correct form to file, as it allows for more detailed reporting of business and professional income.

Recent Changes for AY 2025-26

ITR 4 Updates:

For the Assessment Year (AY) 2025–26, several key updates have been introduced in ITR 4 to make the filing process more comprehensive and user-friendly. One of the notable changes is the inclusion of long-term capital gains (LTCG) under Section 112A, allowing taxpayers to report LTCG up to ₹1.25 lakh. However, this is applicable only if there are no capital losses that need to be adjusted. This change makes it easier for taxpayers with LTCG from listed shares and equity mutual funds to file their returns using ITR 4, as long as the gains fall within the prescribed limit.

Another significant update is the new tax regime introduced under Section 115BAC. For AY 2025–26, the new tax regime has been made the default option in ITR 4. This means that when you file your return using ITR 4, the system will automatically apply the new tax regime unless you choose to opt for the old regime. The new regime offers lower tax rates but removes most exemptions and deductions. However, if you prefer the old tax regime, you can still manually select it during the filing process. This flexibility allows taxpayers to choose the regime that best suits their financial situation.

Online Filing:

Both ITR 1 and ITR 4 now support online filing, which comes with enhanced features to streamline the tax filing process. One of the most beneficial updates is the integration of prefilled data, which automatically populates certain fields in the form based on the information already available with the Income Tax Department. This reduces the chances of manual errors and speeds up the filing process, making it more user-friendly. The prefilled data includes details such as salary income, TDS (Tax Deducted at Source) information, and bank interest details, which simplifies the entire process for taxpayers.

With the introduction of online filing and prefilled data, the overall experience of filing taxes has become more efficient. This is particularly helpful for individuals who are not well-versed in the nuances of tax laws and prefer a simplified, error-free process. The ease of filing online also minimizes the likelihood of facing rejections or notices due to incomplete or incorrect information.

These updates reflect the Income Tax Department’s ongoing efforts to enhance taxpayer convenience, reduce the time spent on filing, and ensure a more accurate and efficient process for the financial year 2025–26. With online filing and prefilled data, taxpayers can file their returns with confidence, knowing that they are in compliance with the latest rules and regulations.

Conclusion

Choosing the correct ITR form is essential for accurate tax filing and avoiding complications. If you have both interest income and business income under the presumptive taxation scheme, ITR 4 is the correct choice. However, if you only have interest income, ITR 1 is the simpler form. TaxBuddy can help guide you through the process, providing assistance with prefilled data, tax regime selection, and error-free filing, ensuring a smooth experience for all taxpayers.

For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

Frequently Asked Question (FAQs)

Q1: Can I file ITR 1 if I have business income under Section 44AD? No, you cannot file ITR 1 if you have business income, even if it is under the presumptive taxation scheme (Section 44AD). ITR 1 is meant for individuals who have income from salary, pension, one house property, and other sources like interest. Any income from business or profession, including under Section 44AD (which allows presumptive taxation for small businesses), disqualifies you from using ITR 1. In such cases, you must opt for ITR 4, which is designed for individuals with income under presumptive taxation schemes.

Q2: What is the maximum income limit for ITR 1 and ITR 4?

Both ITR 1 and ITR 4 are available to individuals with a total income of up to ₹50 lakh. If your total income exceeds this limit, you cannot file either of these forms. However, there are other criteria that also dictate your eligibility, such as the type of income you have (salary, pension, business, etc.). If your total income exceeds ₹50 lakh or if you have income from sources such as capital gains or more than one house property, you would need to file ITR 2 or ITR 3, depending on your situation.

Q3: Can I include interest income in ITR 4?

Yes, interest income can be included in ITR 4. ITR 4 allows you to report various types of interest income, including interest from savings accounts, fixed deposits (FDs), recurring deposits, post office deposits, and any other interest income received during the financial year. It is important to ensure that the interest income is properly reported and categorized under 'Income from Other Sources' in the form. However, if the interest is related to lottery winnings or other forms of income like racehorse winnings, it would need to be reported separately, as it is not considered part of the normal interest income.

Q4: What if I have more than one house property?

If you have income from more than one house property, neither ITR 1 nor ITR 4 is applicable. Both these forms are designed for individuals with income from a single house property. If you have more than one house property and earn income from it, you would need to file ITR 2 instead, which is meant for individuals who have income from multiple sources, including multiple house properties. This includes situations where one or more properties are rented out, and you are reporting rental income, or if you are claiming exemptions like HRA or deductions related to home loan interest.

Q5: Is online filing available for ITR 1 and ITR 4 for AY 2025–26?

Yes, both ITR 1 and ITR 4 are available for online filing for the AY 2025–26. The Income Tax Department has made filing easier by enabling e-filing with prefilled data. This means certain fields, such as personal details and income details, will be automatically filled in based on your PAN and other filings. The online system is designed to make tax filing smoother, reducing the chances of errors. The new updates also help taxpayers verify the forms, confirm their details, and submit their returns without the need for physical documentation. Filing online through platforms like TaxBuddy further simplifies the process, with features like automatic calculation, error-checking, and secure submission.

Q6: What is the deadline for filing ITR 1 or ITR 4 for AY 2025–26?

The deadline for filing ITR 1 or ITR 4 for AY 2025–26 is September 15, 2025. It is important to ensure that the ITR is filed before this deadline to avoid any late fees or penalties. While the government may extend the deadline, it is always best to file your return as early as possible to prevent last-minute issues. The e-filing platform allows you to file returns any time before the due date, making it easy to comply with the timelines and avoid interest on delayed payments.

Q7: Can I use ITR 1 if I have minor business income?

No, any business or professional income, even if it is minor or under presumptive taxation, disqualifies you from using ITR 1. If you have business income under the presumptive taxation scheme, you must use ITR 4 instead of ITR 1. This includes income under Sections 44AD, 44ADA, or 44AE, which allows small businesses to report income without detailed books of accounts. Even if the business income is small, it still requires the use of ITR 4 due to its provisions for business income reporting.

Q8: What if my business income is not under the presumptive scheme?

If your business income is not under the presumptive taxation scheme, neither ITR 1 nor ITR 4 is suitable. In such cases, you must file ITR 3, which is designed for individuals and HUFs with income from business or profession that is not under the presumptive taxation scheme. ITR 3 is more comprehensive and includes sections for detailing the business income, claiming deductions, and reporting complex income sources like capital gains, multiple house properties, or foreign income.

Q9: What is the benefit of using ITR 4 over ITR 1?

ITR 4 allows you to include business income under the presumptive taxation scheme (Sections 44AD, 44ADA, or 44AE), which is not permitted in ITR 1. It is ideal for taxpayers with income from a business or profession who wish to take advantage of simplified taxation under the presumptive scheme. ITR 4 also allows the inclusion of interest income, making it a more versatile form for individuals who have both business and interest income. In contrast, ITR 1 is much simpler but restricts taxpayers to salaried income, one house property, and interest income.

Q10: Can I report capital gains in ITR 4?

Yes, you can report long-term capital gains (LTCG) in ITR 4, but only if the gains are under Section 112A and do not exceed ₹1.25 lakh. This includes gains from listed securities like equity shares and mutual funds. However, capital gains beyond ₹1.25 lakh or from other sources will require filing ITR 2 or ITR 3. It is important to ensure that only eligible capital gains are reported in ITR 4 to avoid discrepancies with the Income Tax Department.

Q11: What types of interest income are allowed in ITR 4?

ITR 4 allows reporting interest income from various sources, including savings accounts, fixed deposits (FDs), recurring deposits, post office savings schemes, tax refunds, and family pensions. These income types are included under 'Income from Other Sources' in ITR 4. However, interest income from lottery winnings, racehorse betting, or other similar sources must be reported separately and may not be eligible for inclusion in this form.

Q12: Do I need to select a tax regime when filing ITR 4?

Yes, when filing ITR 4, you must select the appropriate tax regime for the year. The new tax regime under Section 115BAC is the default option in ITR 4. However, you can switch to the old tax regime if it benefits you. It is important to review both regimes before making a selection to determine which one offers the best tax savings. You can select the tax regime directly in the form, and any changes or confirmations are made within the ITR filing interface.