When to Use ITR 3 Instead of ITR 2: Income from Business, Capital Gains, and More
- Bhavika Rajput
- Jun 19
- 17 min read
Filing the right Income Tax Return (ITR) form is more than just a checkbox on your financial to-do list, it determines whether your return is valid and how effectively your income sources are reported. ITR 2 and ITR 3 cater to distinct taxpayer profiles. If business or professional income, share trading, or partnership firm earnings are part of your financial landscape, ITR 3 is the form to choose. For salaried individuals or those with capital gains but no business activity, ITR 2 usually applies. The distinction has legal and financial implications, especially when you’re navigating the rules for FY 2024–25 (AY 2025–26).
Table of Contents
Who Should Use ITR 2: Income Sources and Conditions
ITR 2 is designed for individuals and Hindu Undivided Families (HUFs) who are not engaged in any business or professional activity but have income from multiple sources. This form is more comprehensive than ITR 1 and caters to taxpayers with a wide range of income streams, ensuring that those with complex financial profiles can report their income accurately. Here’s a breakdown of the income categories for which ITR 2 should be used:
Salary or Pension from One or Multiple Employers Individuals receiving income through salary or pension, whether from one or more employers, must file ITR 2. This category covers all salaried individuals, including those with multiple job sources. It includes allowances, bonuses, and other employment benefits such as pension income received from previous employers.
Rental Income from One or More House Properties If a taxpayer earns rental income from one or more properties, they must use ITR 2 to report this income. Whether the rental income is from residential or commercial properties, the form provides space to list income from multiple properties, along with applicable deductions for maintenance, municipal taxes, and other allowable expenses.
Capital Gains—Both Short-Term and Long-Term One of the significant reasons to use ITR 2 is for reporting capital gains. ITR 2 allows the taxpayer to report both short-term and long-term capital gains from the sale of assets like shares, mutual funds, or property. For long-term capital gains, specific details such as the acquisition date, cost of acquisition, and sale price are required to calculate gains or losses accurately. Short-term capital gains, subject to different taxation, must also be reported in the same way.
Income from Other Sources Like Interest, Dividends, and Lottery Winnings Income from other sources—such as interest income from savings accounts, fixed deposits, or bonds, as well as dividends from shares—must be included in ITR 2. Additionally, if the taxpayer has received any lottery winnings, it is mandatory to report that income as well. The form also accommodates other miscellaneous income, ensuring all financial inflows are documented.
Agricultural Income Exceeding ₹5,000 If the taxpayer has agricultural income exceeding ₹5,000 in a financial year, it must be reported in ITR 2. Agricultural income can include the sale of crops, livestock, or any related activities. However, if the total agricultural income is less than ₹5,000, it does not need to be declared, and ITR 1 can be used instead.
Foreign Assets or Income Taxpayers with foreign income, assets, or financial interests must report these in ITR 2. This includes income from overseas employment, foreign investments, and any other income earned outside India. Furthermore, foreign assets such as bank accounts, property, or shares must also be disclosed, ensuring compliance with tax laws concerning global income.
Directorships in Companies or Unlisted Equity Shareholding ITR 2 also caters to individuals who hold directorships in companies, whether private or public, or have unlisted equity shareholdings. These must be disclosed, as they are considered forms of income or investments. The form allows for detailed reporting of shareholding in companies, which is necessary for tax compliance and transparency.
Losses Carried Forward (Excluding Business Losses) If the taxpayer has carried forward losses from previous years—such as capital losses or losses from other sources—they must report these in ITR 2. These losses can be adjusted against the current year’s gains, which helps in reducing taxable income. However, business losses are not reported in ITR 2 and should be filed under ITR 3 instead.
Clubbed Income (Like Minor Child’s Earnings) If income is clubbed with the taxpayer’s own, such as income earned by a minor child, it must be reported in ITR 2. Clubbing provisions apply when a taxpayer’s income is directly or indirectly transferred to someone else, like a spouse or child, and must be added to their taxable income.
Taxpayers with Resident, NRI, or RNOR Status Individuals who are residents, Non-Resident Indians (NRIs), or Residents but Not Ordinarily Residents (RNOR) should file ITR 2 if they meet the income criteria. NRIs, in particular, often need to report foreign income or assets, which ITR 2 accommodates, ensuring they comply with India’s taxation rules on global income.
Who Should Use ITR 3: Business and Professional Income Explained
ITR 3 is specifically designed for individuals and HUFs who have income from business or professional activities. Unlike ITR 2, which is more suited for individuals with salaried or investment incomes, ITR 3 caters to those engaged in any form of commercial activity, whether as self-employed individuals, freelancers, or partners in a business. The form includes sections for detailed reporting of business and professional income, with the following key categories:
Proprietorship or Self-Employed Business If an individual is running a sole proprietorship or is self-employed in a non-professional capacity, they must file ITR 3. This includes businesses such as retail, manufacturing, or service-based industries where the income is reported as profit from business activity. The form includes provisions to capture detailed financial statements and balance sheets.
Freelancing or Consultancy Services Individuals earning income through freelancing or consultancy services—whether in fields like writing, digital marketing, or management consulting—should file ITR 3. It is used to report income from providing services rather than goods, with sections for detailed reporting of income, expenses, and profit.
Professional Services Like Law, Medicine, Architecture, or IT Those engaged in professional services such as law, medicine, architecture, or IT need to use ITR 3. This form provides a detailed schedule to report income earned from such services, with allowances for expenses and deductions related to professional fees, equipment, and other related costs.
Speculative Income Such as Intra-Day Stock Trading Speculative income, which arises from activities like intra-day stock trading, is included in ITR 3. This type of income is treated differently from regular capital gains and must be reported accurately. ITR 3 captures the nuances of such trading activities, including losses and gains, and applies the correct tax treatment.
Trading in Derivatives or Futures and Options (F&O) Income earned from trading in derivatives or engaging in Futures and Options (F&O) transactions must also be reported in ITR 3. These types of trades involve complex accounting and profit-loss calculations, which ITR 3 supports with detailed reporting fields.
Partnership Firm Earnings (Share of Profit or Remuneration) Individuals who are partners in a partnership firm and receive a share of the firm’s profits or remuneration must report this income in ITR 3. The form allows for the disclosure of partnership income and includes sections for calculating and reporting the profit share.
Rental, Capital Gains, and Other Incomes in Addition to Business Income In addition to business income, individuals filing ITR 3 can also report income from rental properties, capital gains, and other sources of income. This is ideal for those who have multiple income streams, including from investments or property.
Foreign Assets or Overseas Business Income Taxpayers with foreign assets, foreign business income, or income earned from overseas activities need to use ITR 3. The form provides detailed sections to declare these foreign earnings, ensuring compliance with Indian tax laws governing global income.
Carry-Forward of Business or Speculative Losses Individuals or businesses who have suffered losses in the current or previous financial years can carry forward these losses to offset future income. ITR 3 allows taxpayers to report and carry forward business or speculative losses, which can help reduce taxable income in the following years.
Anyone Reporting Profit or Gain from Commercial Activities Anyone engaged in full-time or part-time business, freelancing, or any form of commercial activity, including trading, must file ITR 3. This form accommodates a detailed breakdown of business income and expenses, making it suitable for those reporting financial statements or requiring audit compliance.
Key Differences Between ITR 2 and ITR 3
Criteria | ITR 2 | ITR 3 |
Salary Income | Allowed | Allowed |
House Property | Allowed | Allowed |
Capital Gains | Allowed | Allowed |
Business/Professional Income | Not allowed | Mandatory if applicable |
Partner in a Partnership Firm | Not allowed | Required |
Speculative or Derivatives Trading | Not allowed | Required |
Carry Forward of Business Losses | Not allowed | Allowed |
Foreign Assets/Foreign Income | Allowed | Allowed |
Presumptive Taxation (44AD/ADA/AE) | Not applicable | Not applicable (use ITR 4 if eligible) |
This table makes it clear: the presence of any business-related income—even from activities like F&O—makes ITR 3 mandatory.
When Is ITR 3 Mandatory for Capital Gains and Business Income?
While both ITR 2 and ITR 3 allow for the reporting of capital gains, the decision on which form to use depends on whether you also have business or professional income. The key factor to consider is the presence of business or professional income alongside your capital gains. Here’s when ITR 3 becomes mandatory:
If You Earn Capital Gains and Freelancing Income: If you earn income from both capital gains (e.g., from selling shares, mutual funds, or property) and freelancing (e.g., as a content creator, designer, or consultant), you must file ITR 3. Freelancing is considered business income, and once business income is involved, you are required to use ITR 3. Even if freelancing is your secondary source of income, it necessitates filing ITR 3 due to the business component.
If You Have Capital Gains Only (Salary or Rental Income): If your income consists only of capital gains (either short-term or long-term) along with salary or rental income, you can file ITR 2. ITR 2 is designed for individuals who do not have business or professional income but need to report complex sources of income, such as capital gains, multiple house properties, or foreign assets.
If You Have Capital Gains and Trade in Derivatives: If you have capital gains and are involved in trading derivatives or futures & options (F&O), this is considered business income. Since trading in F&O is classified as a business activity, you must file ITR 3, even if your primary source of income is from capital gains. ITR 3 allows you to report business income alongside your capital gains, making it the correct choice for such cases.
The moment business or professional income enters your income profile, even if it’s secondary or part-time, you must opt for ITR 3. The Income Tax Department mandates this to ensure that all business-related income is properly reported. Filing ITR 2 in cases where business income is present can lead to an invalid or defective return, which would require revision and resubmission under ITR 3.
Choosing Between ITR 2 vs ITR 3 for Freelancers and Traders
For individuals in freelance or professional services, the choice between ITR 2 and ITR 3 becomes clear when business income is present. Here’s a breakdown of when and why freelancers, consultants, and traders should file ITR 3:
Freelancers and Independent Consultants: Freelancers and independent consultants—regardless of the nature of their work—fall under the category of individuals who earn business income. This includes professions such as:
Content Writers and Graphic Designers: Writers, artists, and designers who offer services independently must report their income as business income.
Legal Advisors, Chartered Accountants, and Tax Consultants: Professionals offering advisory services on a freelance basis, including legal advice, tax consultancy, and business strategy consulting, must also file ITR 3.
Finance, Marketing, and IT Consultants: Independent consultants in fields like finance, marketing, IT, and other technical domains also qualify as business income earners and should file ITR 3.
YouTubers, Influencers, and Digital Marketers: Individuals making money through platforms like YouTube, Instagram, or by working with brands on digital marketing campaigns are considered to have business income. This income needs to be reported under ITR 3.
Even if freelancing is part-time or irregular, it still counts as business or professional income. The government does not allow mixing business income with other income sources like salary or capital gains in ITR 2. Filing ITR 2 when professional or freelancing income is involved will result in a defective return notice, which will force you to revise and re-file using ITR 3.
Traders Engaging in F&O or Intraday Trading: Traders who engage in activities like futures & options (F&O), intraday trading, or commodity trading are considered to be running a business. Although such trading activities may appear similar to capital gains reporting, the tax treatment of such income is different. Income from F&O trading or intraday trades is categorized as business income because these activities are more structured and frequent than typical investing. Therefore, even if your primary income is from capital gains, if you trade in these financial instruments, you are required to file ITR 3.
Importance of Choosing the Right Form: Filing ITR 3 for business income, including freelancing and trading, is crucial because this form allows you to declare and calculate business income correctly. It also provides the flexibility to claim deductions related to business expenses, such as office rent, professional fees, or the cost of equipment used in freelancing or trading activities. Incorrectly filing ITR 2 when you should file ITR 3 can lead to an incorrect tax assessment, delays in processing, and penalties for underreporting income.
Common Scenarios That Require ITR 3 Filing
Filing income tax returns (ITR) is a key obligation for taxpayers, and choosing the right ITR form is critical to ensure proper reporting of income. While ITR 1 and ITR 2 are suitable for individuals with simpler income sources, ITR 3 is required in certain scenarios where taxpayers have more complex sources of income. Below are some common situations where ITR 3 filing is necessary:
A Salaried Individual Takes Up Weekend Freelancing Assignments
If a salaried individual takes on freelancing work during weekends or after office hours, they generate income from a source other than their primary employment. While the salaried income will be reported under the salary section in ITR 3, the freelancing income, which is considered "business or profession income," needs to be reported separately. This type of income may involve expenses related to freelance work (like travel costs, software tools, or office supplies), which can be claimed as deductions, thus making ITR 3 the correct form. Failing to report the freelancing income under the right section would lead to improper tax calculation, potentially resulting in notices from the tax department.
A Retired Professional Starts Consultancy Work on a Contract Basis
When a retired professional, such as a former doctor, engineer, or lawyer, decides to offer consultancy services on a contract basis, their income is considered business or profession income. Although they may be receiving a pension, which could be filed under ITR 1, the consultancy fees are categorized as income from business, which requires ITR 3. Moreover, such professionals may incur expenses related to their consultancy services, such as office rent, utilities, and communication costs, which can be deducted from the consultancy income. ITR 3 ensures accurate reporting of both the pension income and the consultancy income.
An NRI Earns Commission Income from a Business Back in India
Non-Resident Indians (NRIs) who earn commission income from a business or any other source in India must file their returns under ITR 3. While an NRI’s foreign income may not be taxed in India, the commission earned from Indian sources is taxable. NRIs with income from commissions, particularly if they are part of a business venture or have a share in a partnership, need to report this income on ITR 3. Failure to file under the appropriate form could lead to issues with tax authorities, as ITR 1 does not support reporting of income earned from a business or profession in India. ITR 3 enables NRIs to claim any applicable deductions or exemptions available under Indian tax laws.
A Young Investor Starts Trading in Options or Derivatives
For a young investor who ventures into trading options, futures, or derivatives, ITR 3 is the correct form. While regular income such as salary or interest from fixed deposits may be filed under ITR 1 or ITR 2, trading income is treated as "business income" or "income from other sources," depending on the nature and scale of the trading activity. Frequent traders, or those trading in complex instruments like derivatives, must report their profits and losses under the "income from business and profession" section of ITR 3. Additionally, they can deduct transaction costs, brokerage fees, and other expenses incurred in generating income. For traders who occasionally dabble in the stock market, ITR 3 is still necessary if their trading activity crosses certain thresholds, making it imperative to properly classify their income.
A Partner in a Domestic Firm Receives Share of Profit and Interest
Partners in domestic firms are required to file ITR 3, regardless of whether they receive a salary or a share of profit from the partnership. The share of profit earned by the partner is tax-exempt, but other income received in the form of interest, remuneration, or commission from the firm must be reported under the "Income from Business or Profession" section of ITR 3. This form also enables partners to report their share of losses, if applicable, and carry forward losses to offset future profits, ensuring tax benefits. If there is any interest on capital invested in the firm, this too must be reported. Properly using ITR 3 ensures that the partner is in compliance with the tax laws and that they receive the correct tax treatment for their share of profit.
In All Such Cases, ITR 3 is the Right—and Only—Option
In all of the scenarios above, ITR 3 is the right and only option to accurately report income and claim applicable deductions. Whether it's a salaried individual with a side hustle, a retired professional working as a consultant, an NRI earning commission income, a young investor trading in the stock market, or a partner in a firm, ITR 3 caters to all these complex income scenarios. Even income from side hustles or gig economy work, which is increasingly common in today's economy, triggers the need to file under this form. ITR 3 enables taxpayers to report various sources of income, claim deductions, and ensure their tax liability is calculated correctly.
Filing under the wrong form, such as ITR 1 or ITR 2, can result in incorrect reporting of income, leading to notices or penalties from the tax authorities. It's crucial to choose the right form, and ITR 3 ensures that all sources of income are reported accurately.
Recent ITR Form Updates for FY 2024-25
The Income Tax Department has introduced several key updates applicable from FY 2024–25 (AY 2025–26), impacting ITR 2 and ITR 3 filers alike. However, individuals filing ITR 3, especially those with business or professional income, will face broader disclosure obligations. Here’s what’s new:
Capital Gains Split Reporting
With the Finance Act, 2024, a new compliance requirement mandates that taxpayers must now bifurcate capital gains based on the transaction date—before or after 23 July 2024. This applies to both short-term and long-term gains. The move aims to reflect updated cost inflation index rules and align with recent changes in capital gains taxation.
This impacts anyone selling shares, mutual funds, or real estate within the financial year. If a transaction spans both periods, the gain must be split and reported accordingly. For those filing ITR 3, where multiple sources of income are clubbed, this demands extra precision in reporting to avoid mismatches or triggering scrutiny.
Buyback Losses Recognition
Effective from 1 October 2024, losses from share buybacks can now be claimed only if the corresponding dividend income is disclosed under ‘Income from Other Sources’. This corrects earlier mismatches where taxpayers would report losses from buybacks without reflecting any related income.
This change is particularly relevant for investors who routinely participate in buyback offers and later claim losses. Accurate classification of such transactions is crucial, especially in ITR 3, where complex portfolios involving trading, capital gains, and business income often coexist.
Asset & Liability Declaration Threshold Increased
Earlier, individuals with a total income exceeding ₹50 lakh were required to declare movable and immovable assets (cars, jewelry, shares, etc.) and liabilities. Now, this requirement has been raised to ₹1 crore. This update simplifies compliance for upper-middle-class taxpayers and removes the burden of detailed reporting for those earning just above ₹50 lakh.
However, for high-income professionals, traders, and business owners filing ITR 3, this disclosure remains mandatory—emphasizing the need for proper asset documentation.
Granular Deduction Reporting under Key Sections
Section-wise deductions must now be reported with more granularity. For example:
Under Section 80C, each investment (ELSS, PPF, LIC premium, etc.) must be separately disclosed
Section 10(13A) (HRA) and other exemptions now require detailed breakup and supporting fields
This aims to enhance data validation and reduce errors. Taxpayers filing ITR 3—who often combine business and personal investments—must ensure their deduction claims are precisely itemized and backed by records.
TDS Code Disclosure Now Mandatory
Taxpayers must now mention the exact TDS section code under which tax was deducted. For example:
Section 192 for salary
This change improves reconciliation between the taxpayer’s return and Form 26AS/TRACES. ITR 3 filers—who typically receive payments under multiple TDS categories—must match each entry accurately to prevent discrepancies or delayed refunds.
Collectively, these updates reflect a shift toward higher transparency and stricter compliance, especially for those with diverse income sources. Whether you’re a salaried professional with capital gains or a consultant juggling multiple clients, these changes mean your ITR filing needs to be sharper, better documented, and error-free.
Platforms like TaxBuddy make this process easier by auto-fetching data, mapping TDS sections, and structuring capital gains and deductions accurately—helping ensure that your return complies with the latest updates without confusion or oversight.
TaxBuddy: Simplifying the ITR Selection and Filing Process
TaxBuddy has emerged as a trusted name for accurate and assisted tax filing. It intelligently matches your income profile with the correct ITR form and auto-fetches information from Form 16, broker platforms, and other sources. For business professionals, traders, and freelancers, it simplifies complex reporting by mapping F&O trades and enabling seamless computation of business income. Whether you’re a salaried individual, consultant, or director in a company, TaxBuddy’s app ensures error-free filing, quick assistance, and post-filing support—all within a secure interface.
Conclusion
Understanding when to file ITR 3 instead of ITR 2 saves you from unnecessary complications and government notices. If you’re earning income from a business, partnership, trading, or freelance work—even on the side—ITR 3 is the correct and legal form to file. On the other hand, if your income is limited to salary, capital gains, and property without any business activity, ITR 2 remains appropriate.
For a secure, simple, and accurate filing experience, it’s wise to use guided platforms. 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.
Faqs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted ITR filing plans. You can choose to file your income tax return independently using their smart platform or opt for expert help to ensure accuracy and better tax planning.
Q2. Which is the best site to file ITR?
Several platforms allow online ITR filing, but TaxBuddy stands out for its AI-driven filing, expert support, post-filing notice assistance, and ease of use. It is especially useful for taxpayers dealing with multiple income sources or complex scenarios like business income or capital gains.
Q3. Where to file an income tax return?
You can file your income tax return on the official government portal (incometax.gov.in) or use authorized e-return intermediaries like TaxBuddy, which offers a guided, secure platform for online income tax filing.
Q4. What happens if I mistakenly file ITR 2 instead of ITR 3?
If you file ITR 2 while having business or professional income, the Income Tax Department may issue a defective return notice under Section 139(9). You’ll be required to revise and resubmit the return using ITR 3.
Q5. Can I file ITR 2 if I have done some part-time freelance work?
No, even part-time or occasional freelance income is treated as professional income. In such cases, you must file ITR 3 regardless of the income amount.
Q6. Is ITR 3 mandatory for F&O traders and speculative business income?
Yes, ITR 3 is mandatory for taxpayers earning income from F&O trades, speculative trading, or intra-day equity transactions. These are considered business income under the Income Tax Act.
Q7. I have only capital gains and salary. Which ITR form should I use?
If there is no business or professional income, and your sources include only salary, capital gains, and perhaps rental income or other sources like interest, ITR 2 is sufficient.
Q8. Can I carry forward business losses under ITR 2?
No, ITR 2 does not allow you to carry forward business or professional losses. To report and carry forward such losses, you must file ITR 3.
Q9. Is there a benefit to using TaxBuddy for ITR 3 filing?
Yes, TaxBuddy simplifies ITR 3 filing by auto-fetching income details from broker platforms, structuring business income, and calculating eligible deductions. It ensures error-free filing and helps avoid notice triggers from incorrect declarations.
Q10. Do I need to maintain books of accounts if I’m filing ITR 3?
If your business income exceeds the specified thresholds under Section 44AA, or if your turnover is above limits that require audit, maintaining books is mandatory. For smaller businesses or freelancers below audit limits, simplified disclosures are allowed under ITR 3.
Q11. Can I use ITR 3 even if I don’t have business income this year but had it last year?
Yes, you can still use ITR 3. However, if you have no business income for the current financial year, and your income is limited to salary, capital gains, or property, you may switch back to ITR 2.
Q12. Is it safe to file ITR through platforms like TaxBuddy?
Absolutely. TaxBuddy is an authorized e-Return Intermediary (ERI) by the Government of India. It follows strict data security protocols, encrypts all information, and offers a secure platform for seamless and accurate income tax return filing.
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