Rental + Share Income? ITR Form Decision Between ITR 2 and ITR 3 (AY 2025-26)

When filing taxes, selecting the right Income Tax Return (ITR) form is vital, especially if you have multiple income sources such as rental income and share income. For the assessment year (AY) 2025-26, understanding whether to file ITR 2 or ITR 3 is crucial to ensure compliance with the Income Tax Act, 1961. If your income includes rental earnings from one or more properties and capital gains from shares or mutual funds, your choice of ITR form largely depends on whether you have any business or professional income, such as F&O trading or freelancing. For those without business/professional income, ITR 2 is typically the correct form. However, if you are involved in business or profession, or if you have F&O trading income or are a partner in a firm, you will need to file ITR 3.

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Table of Contents

• Who Should File ITR 2?

• Who Should File ITR 3?

• Rental + Share Income: Which ITR Form to Use?

• Key Updates for AY 2025-26

• Conclusion

• FAQs

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Who Should File ITR 2?

ITR 2 is specifically designed for individuals or Hindu Undivided Families (HUFs) who derive income from multiple sources, and do not have business or professional income. This form is ideal for those with a more diversified income profile. Below is a detailed explanation of who should file ITR 2:

Salary or Pension Income: If you earn a salary or receive a pension income, you can use ITR 2 for filing your tax return. This applies to both salaried employees working in various sectors and individuals who are receiving pension benefits.

Rental Income: Rental income, whether from residential or commercial properties, must be reported in ITR 2. If you own one or more properties and earn rental income, ITR 2 is the correct form to use. This includes rental income from any property you own, either on a lease basis or any other form of rental arrangement.

Capital Gains: ITR 2 should be filed by individuals who have earned capital gains, whether short-term or long-term. This includes gains from the sale of assets like stocks, mutual funds, property, or other investments. It’s essential to disclose the amount earned through these transactions, as the tax treatment for capital gains varies based on the holding period of the asset.

Income from Other Sources: If you have income from other sources such as interest income, dividend income, or any form of passive income, you should file ITR 2. This also includes winnings from lotteries, legal settlements, or any other miscellaneous sources of income.

Foreign Assets or Foreign Income: If you own assets outside India, or have earned income from foreign sources, you are required to report this in ITR 2. This includes foreign bank accounts, investments, or any form of foreign income like rent, interest, or dividends from assets located abroad.

Agricultural Income: Agricultural income must be reported in ITR 2 if it exceeds ₹5,000. This is applicable even if the income is from farming, livestock, or any other agricultural activity. However, for individuals with agricultural income below ₹5,000, there is no need to report it.

Directorship or Unlisted Shares: If you are a director in a company or hold shares in an unlisted company, ITR 2 must be filed. The income from dividends, capital gains, or any associated earnings must be disclosed accurately.

However, ITR 2 cannot be used by individuals who have income from business or profession, such as income from F&O trading or freelancing. In these cases, ITR 3 is required.

Who Should File ITR 3?

ITR 3 is meant for individuals or Hindu Undivided Families (HUFs) who have income from business or profession, in addition to other sources such as salary, rental income, or capital gains. The following individuals must file ITR 3:

Business or Professional Income: If you are self-employed, a freelancer, or earn income from any business activities, you are required to file ITR 3. This includes income from freelancing, consulting, or running a business as a sole proprietor. Additionally, if you are involved in F&O (Futures and Options) trading or any other form of business, ITR 3 is the appropriate form. Self-employed professionals like doctors, lawyers, or chartered accountants must also file ITR 3.

Partnership Firm: If you are a partner in a partnership firm, whether it’s a general or limited liability partnership (LLP), you are required to file ITR 3. This is because income received as a partner’s share in the firm must be reported under this form. This includes profit shares, salary, or other remunerations received from the partnership firm.

Income from Salary, Rental, Capital Gains, etc., with Business/Professional Income: Even if you have rental income, capital gains, and salary income, but also have income from business or professional sources, ITR 3 must be filed. For example, if you receive a salary from your employer, earn rent from a property, make capital gains from the sale of stocks, and also run a consulting business, you must file ITR 3, as the form is designed for taxpayers who have both personal and business/professional income.

ITR 3 cannot be used by companies, trusts, LLPs, or other non-individual entities. It is exclusively for individual taxpayers and HUFs. If you belong to any of these categories, other forms like ITR 5, 6, or 7 should be used instead.

In essence, ITR 3 is for individuals with a more complex income profile—those who combine business or professional income with personal income, such as salary, rental income, and capital gains. If you have any form of business or professional income, it’s crucial to opt for ITR 3 to ensure compliance with the tax laws.

Rental + Share Income: Which ITR Form to Use?

When you have a combination of rental income and share income, the ITR form you file depends on the type of income you earn beyond these sources. Here's a detailed guide to help you decide:

Scenario	ITR 2	ITR 3
Salary + Rental Income + Capital Gains from Shares/Mutual Funds	✔️
Salary + Rental Income + Capital Gains + F&O Trading (Derivatives)		✔️
Salary + Rental Income + Business/Professional Income (e.g., freelancing)		✔️
Salary + Rental Income + Partner in Firm		✔️

• File ITR 2 if your share income is solely from capital gains (whether short-term or long-term) and you do not have any business or professional income. This form is appropriate for those who earn from salary, rental income, and capital gains without engaging in F&O trading or business.
  

• File ITR 3 if you have business or professional income, including income from F&O trading (which is considered a form of business income), freelancing, or if you are a partner in a firm. ITR 3 is the appropriate form for individuals who are involved in any form of business activity.

Key Updates for AY 2025-26

The Income Tax Department has introduced several key updates for the assessment year (AY) 2025-26 that impact both ITR 2 and ITR 3 filings. These updates are crucial for ensuring your return is filed correctly and on time:

• Capital Gains Reporting: A significant change has been made in how capital gains are reported. For tax calculation, capital gains must be split based on the transfer date: before or after 23rd July 2024. This change is due to updated tax rates introduced in the 2024 Budget. It’s important to ensure that the correct dates are used to categorize capital gains for accurate reporting.
  

• Buyback Losses: From 1st October 2024, individuals can now claim losses on share buybacks. However, this is only possible if the corresponding dividend income is reported under "Income from Other Sources." This change helps investors recover losses from buybacks, making it essential to maintain proper records.
  

• Asset & Liability Reporting: The threshold for reporting assets and liabilities has been raised to ₹1 crore of total income, up from ₹50 lakh. Taxpayers with an income above this threshold must ensure they provide detailed disclosures of their assets and liabilities during the filing process.
  

• Enhanced Disclosure Requirements: There are now stricter reporting requirements for deductions under sections like 80C. Additionally, there are new TDS section code requirements that taxpayers need to be aware of when filing their returns. It is important to comply with these enhanced disclosures to avoid delays or penalties.

Conclusion

Selecting the right ITR form is vital for ensuring that your tax filing process is smooth, accurate, and compliant with the Income Tax Act. If your income consists of rental income and capital gains from shares without any business or professional income, ITR 2 is typically sufficient. However, if you are involved in business or professional income—such as F&O trading or freelancing—you must file ITR 3. To make the filing process even easier and ensure you select the correct form, consider using the TaxBuddy mobile app. TaxBuddy guides you step-by-step, ensuring you file the appropriate form based on your income profile.

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. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? A: Yes, TaxBuddy offers both self-filing and expert-assisted plans to cater to different user needs. With the self-filing plan, you can file your ITR independently using TaxBuddy's easy-to-use interface, which provides step-by-step guidance. If you prefer expert assistance, TaxBuddy also offers the option to consult with a tax expert who can handle your entire filing process, ensuring accuracy and compliance with all tax regulations. This flexibility makes TaxBuddy suitable for both DIY filers and those who need additional support.

Q2. Which is the best site to file ITR? A: TaxBuddy is one of the best sites to file ITR, offering a secure and hassle-free experience with both self-filing and expert-assisted options. The platform uses AI-driven solutions to simplify the filing process, reducing the risk of errors. TaxBuddy also ensures that your tax return is filed accurately, with compliance checks to help you maximize your eligible deductions. Whether you're filing ITR 1, 2, or 3, TaxBuddy provides a seamless experience that saves time and effort.

Q3. Where to file an income tax return?

A: You can file your income tax return directly on the official Income Tax Department website or use TaxBuddy for a seamless experience. TaxBuddy offers an intuitive and user-friendly platform to file your return, making it easier to navigate through the process. The TaxBuddy platform guides you step-by-step, ensuring you select the correct ITR form, provide accurate details, and complete the filing without any stress. Additionally, you can take advantage of their expert assistance plans if you need help with complex filings.

Q4. What is the difference between ITR 2 and ITR 3?

A: ITR 2 is designed for individuals and Hindu Undivided Families (HUFs) with income from salary, pension, rental income, and capital gains. This form is suitable for taxpayers without business or professional income. On the other hand, ITR 3 is for individuals or HUFs who have business or professional income in addition to other sources like salary or rental income. If you are self-employed, a freelancer, or have income from F&O trading or as a partner in a firm, you must file ITR 3.

Q5. Can I file ITR 2 if I have rental income and capital gains?

A: Yes, you can file ITR 2 if your income consists of rental income from one or more properties and capital gains (from stocks, mutual funds, etc.), provided you do not have any business or professional income. ITR 2 is designed for individuals who earn income from salary, pension, rental income, capital gains, and other sources like interest and dividends. If you have any income from business activities, you will need to file ITR 3 instead.

Q6. Do I need to file ITR 3 if I have income from F&O trading?

A: Yes, if you have income from F&O trading, you must file ITR 3. F&O trading is considered a business activity, and income derived from it is categorized as business income. Since ITR 2 is not meant for those with business or professional income, ITR 3 is the correct form to file in this case. It is essential to correctly report all income sources to avoid penalties or errors in your tax return.

Q7. Is agricultural income above ₹5,000 reportable in ITR 2?

A: Yes, agricultural income exceeding ₹5,000 must be reported in ITR 2. If your agricultural income surpasses this threshold, it becomes a part of your total taxable income and needs to be disclosed in your ITR. The Income Tax Department requires taxpayers to report agricultural income in ITR 2 to determine the correct tax liability. While agricultural income is exempt from tax under certain conditions, it still needs to be reported accurately.

Q8. What happens if I file the wrong ITR form?

A: Filing the wrong ITR form can lead to several complications, including delays in processing your tax return, penalties, and the disallowance of certain deductions. It is essential to choose the correct ITR form based on your income sources. If you accidentally file the wrong form, the Income Tax Department may send you a notice for rectification or may ask for additional documentation. In such cases, you may need to file a revised return under Section 139(5) to correct any discrepancies.

Q9. How do I report foreign assets and income?

A: Foreign assets and income must be reported in both ITR 2 and ITR 3, depending on the nature of your income. If you have income from foreign sources or own assets outside India, you are required to disclose them in your ITR. In ITR 2, you will report foreign income and assets under the relevant sections, while in ITR 3, additional disclosures related to business/professional income may be required. Proper reporting is necessary to ensure compliance with the Foreign Account Tax Compliance Act (FATCA) and other global tax requirements.

Q10. Can I file ITR 1 if I have capital gains?

A: You can file ITR 1 if your capital gains are within the specified limit. For example, short-term capital gains up to ₹1.25 lakh can be filed using ITR 1, provided you meet all the other eligibility criteria for ITR 1, such as having income only from salary, pension, and interest. However, if your capital gains exceed this limit or involve long-term capital gains or gains from complex financial instruments, you should file ITR 2 instead.

Q11. Can a salaried individual with rental income use ITR 1?

A: A salaried individual with rental income cannot use ITR 1. ITR 1 is designed for individuals who have income only from salary, pension, and interest, without any additional sources like rental income. If you receive rental income from one or more properties, you must file ITR 2. This form accommodates income from salary, rental income, capital gains, and other sources, ensuring compliance with tax regulations.

Q12. How do I file a revised ITR?

A: A revised ITR can be filed under Section 139(5) if you realize there are errors or omissions in your initially filed return. You can file a revised return if you missed reporting income, claimed incorrect deductions, or made any other mistake. To do this, you need to log into your e-filing account, select the option for filing a revised return, and provide the correct information. The revised ITR must be filed within the prescribed deadline, which is usually before the end of the assessment year or the completion of the assessment, whichever is earlier.