Received Dividend and Capital Gains? You Likely Can’t Use ITR-1

Q: How does TaxBuddy help with ITR selection?

TaxBuddy simplifies the process of selecting the correct ITR form by reviewing your income sources, including salary, capital gains, dividend income, and others. The mobile app guides you through a series of questions to determine the most appropriate ITR form, minimizing the risk of errors, penalties, and notices. TaxBuddy helps users navigate the complexities of ITR filing and ensures accuracy in the form selection.

PRITI SIRDESHMUKH
Jul 16
8 min read

Filing your Income Tax Return (ITR) is an essential process for taxpayers in India, and choosing the right ITR form is crucial. ITR-1, also known as the "Sahaj" form, is designed for individuals who have a simple tax situation, including income from salary, one house property, and other sources like interest. However, there are certain scenarios where ITR-1 may not be the correct choice, especially if you have dividend income, capital gains, or income from other sources beyond the scope of the form. Let us explore why ITR-1 may not be suitable if you have dividend or capital gains income, the new criteria for capital gains, and other key restrictions. We’ll also discuss the recent updates and official guidelines to help you determine if ITR-1 is the right choice for you in the upcoming assessment year.

Table of Contents:

Why ITR-1 May Not Be for You If You Have Dividend or Capital Gains

Capital Gains: New Relaxed Criteria for AY 2025-26

Dividend Income and ITR-1: What You Need to Know

Other Key ITR-1 Restrictions

Recent News and Official Updates on ITR-1 Eligibility

Addressing Specific Questions

Conclusion

FAQs

Why ITR-1 May Not Be for You If You Have Dividend or Capital Gains

ITR-1 is intended for individuals who have income from simple sources, but if you have income from dividend or capital gains, you might find it restrictive. The form is not designed to handle the complexity of income derived from investments such as shares, mutual funds, or bonds. If your income includes substantial dividends or capital gains, filing ITR-1 can lead to errors or the omission of necessary details that could affect your tax liability.

For instance, if you have long-term or short-term capital gains, you may be eligible for tax exemptions or reduced tax rates depending on the type of gains. ITR-1 does not allow you to claim such exemptions or make adjustments for capital gains, as it lacks the necessary fields to report complex investment income properly. Similarly, dividend income above ₹10 lakh is subject to tax, and the declaration of such income requires the use of a more detailed form like ITR-2 or ITR-3, which provide the necessary sections for such disclosures.

Capital Gains: New Relaxed Criteria for AY 2025-26

The Income Tax Department has relaxed the criteria for capital gains in AY 2025-26, especially for those investing in listed securities, mutual funds, and bonds. The government has introduced changes that make it easier to calculate and declare capital gains, particularly for long-term capital gains (LTCG) on listed shares and equity-oriented mutual funds.

Previously, calculating capital gains could be a complicated task, requiring detailed reporting of the acquisition cost, sale price, and other details. The new changes aim to simplify this process, particularly for those who invest in listed securities. For example, taxpayers can now avail of a simplified method for computing LTCG on listed stocks, with the exemption up to ₹1 lakh remaining intact for most taxpayers. However, because of these changes, if you have capital gains, ITR-1 will no longer be suitable, and you will need to opt for ITR-2 or ITR-3, which allow for the correct declaration and tax treatment of capital gains.

Dividend Income and ITR-1: What You Need to Know

Dividend income is another area where ITR-1 may not be appropriate. Under the old tax regime, dividend income was tax-free up to ₹10 lakh, but anything above that was subject to tax. However, in the new tax regime, there’s no such exemption, and all dividend income is taxable. If your total dividend income exceeds ₹10 lakh in a year, you must file a more comprehensive form like ITR-2 or ITR-3, which can accommodate the necessary details for taxing higher dividend income.

ITR-1 allows reporting of dividend income, but only up to a limit of ₹10 lakh. If you have dividend income above this threshold, you will need to use the appropriate form to ensure that your tax is calculated correctly, as the excess income is subject to tax at the applicable rates. Additionally, if you have income from multiple sources of dividends, including foreign investments, ITR-1 will not allow you to declare such income properly, further emphasizing the need for the more detailed ITR-2 or ITR-3 forms.

Other Key ITR-1 Restrictions

While ITR-1 is simple and quick, it has several key restrictions. One of the most important is that it is only suitable for individuals with income from salary, a single house property, and other minor sources such as interest or family pension. If you have income from multiple house properties, business or profession, foreign assets, or agriculture, ITR-1 is not applicable.

Other restrictions include:

You cannot file ITR-1 if you are a director in a company.
ITR-1 cannot be used if you have income from capital gains (other than the exempted long-term capital gains on listed shares).
If you have claimed deductions under Section 80G (charitable donations) or Section 80D (health insurance), you will need to switch to a more appropriate form like ITR-2.

These restrictions ensure that only individuals with simpler tax situations can use ITR-1, and others must use more comprehensive forms like ITR-2 or ITR-3, which can accommodate more complex income structures.

Recent News and Official Updates on ITR-1 Eligibility

Recent updates to ITR forms and eligibility criteria have expanded the scope of who can use ITR-1. Previously, taxpayers with any form of business or professional income were excluded from using ITR-1, but now, this form can also be used by individuals who have rental income from a single property and no other business income.

Additionally, for the assessment year 2025-26, there have been updates allowing taxpayers with agricultural income of up to ₹5,000 to file ITR-1, which was previously not allowed. However, despite these updates, individuals with income from multiple sources of capital gains or dividends, as well as more complex financial situations, are still ineligible to use ITR-1.

Addressing Specific Questions

Q1: Can I use ITR-1 if I have capital gains under ₹1 lakh? Yes, you can file ITR-1 if your capital gains are below ₹1 lakh, as long as they are from listed shares or mutual funds. For more complex capital gains, you’ll need to use ITR-2.

Q2: What if I have a dividend income of ₹12 lakh in total? If your dividend income exceeds ₹10 lakh, you cannot use ITR-1. You must opt for ITR-2 or ITR-3, which allow you to declare the complete income and apply the correct tax treatment.

Q3: Can I file ITR-1 if I am a director of a company? No, ITR-1 is not applicable if you are a director in a company. In such cases, you must use ITR-2 or ITR-3.

Conclusion

Navigating the right ITR form is crucial for accurate and hassle-free tax filing. With the latest changes, more taxpayers with modest capital gains can use ITR-1, but the form remains off-limits for those with complex or high-value capital gains and certain types of dividend income. If you’re unsure or want a seamless experience, consider usingTaxBuddy’s mobile app, which automatically selects the right ITR form for you and ensures all reporting requirements are met.

FAQs

Q1. Can I use ITR-1 if my long-term capital gains are ₹1.20 lakh? Yes, if your long-term capital gains (LTCG) are ₹1.20 lakh, you can use ITR-1 to file your return, provided the gains are from listed equity shares or equity mutual funds and meet other criteria for ITR-1. ITR-1 is available for individuals with income from salary, pension, and other specified sources, but the total LTCG should not exceed ₹1.25 lakh. If your gains are from other sources or exceed the limit, you’ll need to use a different form, such as ITR-2 or ITR-3.

Q2. What if I have dividend income from a buyback of shares? If you have dividend income from a buyback of shares, you cannot use ITR-1. This income is now classified as a deemed dividend and must be reported in ITR-2 or ITR-3. Dividend income from buybacks is treated differently due to tax implications and requires the use of more complex forms for accurate reporting.

Q3. If I have capital gains from debt mutual funds, which ITR should I use? If you have capital gains from debt mutual funds, you must use ITR-2 or ITR-3. ITR-1 cannot be used to report capital gains from debt funds, as the form is designed only for simpler income structures. Debt mutual fund gains are considered non-equity, and therefore a more detailed return such as ITR-2 or ITR-3 is required to report these accurately.

Q4. Can I use ITR-1 if I have carried-forward capital losses? No, you cannot use ITR-1 if you have any carried-forward or brought-forward capital losses. These losses need to be reported in more detailed forms, like ITR-2 or ITR-3, which allow for the declaration of losses and their set-off against future gains. ITR-1 is a simpler form that does not support the reporting of losses.

Q5. How does TaxBuddy help with ITR selection? TaxBuddy simplifies the process of selecting the correct ITR form by reviewing your income sources, including salary, capital gains, dividend income, and others. The mobile app guides you through a series of questions to determine the most appropriate ITR form, minimizing the risk of errors, penalties, and notices. TaxBuddy helps users navigate the complexities of ITR filing and ensures accuracy in the form selection.

Q6. Can I file ITR-1 if I have both dividend income and capital gains? Yes, you can file ITR-1 if you have dividend income and capital gains, provided your total Long-Term Capital Gains (LTCG) are below ₹1.25 lakh, and there are no carried-forward losses. This form is designed for individuals with straightforward income sources such as salary, pension, interest, and minor capital gains, along with dividend income. If your capital gains or other income sources are more complex, you may need to use ITR-2 or ITR-3.

Q7. What documents do I need for filing ITR-1 with dividend income? When filing ITR-1 with dividend income, you will need the following documents:

Your dividend statements from the respective companies or mutual funds
TDS certificates showing tax deducted at source (if applicable)
Bank statements or proof of any other income
Any other income-related documents, such as Form 16 (for salary income)

Having these documents in hand ensures a smoother filing process and avoids discrepancies.

Q8. Is it mandatory to report TDS for capital gains in ITR-1? Yes, for the assessment year 2025-26, you must specify the TDS section under which tax was deducted for each income source, including capital gains. If TDS has been deducted at source on your capital gains, this information needs to be mentioned in the relevant sections of your ITR-1 form. Failure to report TDS can result in discrepancies and delays in processing.

Q9. Can NRIs use ITR-1 for dividend income? No, NRIs cannot use ITR-1 for filing their returns, including for dividend income. ITR-1 is exclusively available to resident individuals. NRIs must use ITR-2 or ITR-3, depending on their income sources and specific circumstances. ITR-2 or ITR-3 accommodates the complexities of income from foreign sources, property, or investments that NRIs typically have.

Q10. If my capital gains are below ₹1.25 lakh but I have business income, can I use ITR-1? No, if you have business income, you cannot use ITR-1. ITR-1 is only for individuals with simple income sources, such as salary, pension, and some capital gains. If you have business income, you will need to use ITR-4, which is designed for individuals and Hindu Undivided Families (HUFs) with income from business, profession, or other sources like capital gains.

Q11. What is the tax rate on capital gains over ₹1.25 lakh in the new regime? In the new tax regime, long-term capital gains (LTCG) exceeding ₹1.25 lakh are taxed at 12.5% without the benefit of indexation. This tax rate applies to equity shares, equity mutual funds, and other assets considered under the provisions of LTCG. The tax treatment may vary depending on the type of asset and whether indexation benefits are applicable under the old tax regime.

Q12. Where can I get assistance with ITR filing? For personalized assistance with ITR filing, you can download the TaxBuddy mobile app. It simplifies the entire process by guiding you through each step, ensuring accuracy, and offering expert support. Whether you’re filing ITR-1, ITR-2, or any other form, TaxBuddy makes the process hassle-free, ensuring compliance with all tax laws and reducing the risk of errors or penalties.