Feb 25, 20233 min read

What applies to ITR-1, and what does not apply to ITR-1?

It is getting foggier in the air! It feels confusing and conflicting! So how about we add clarity to our winters - the clarity of thoughts, knowledge, and rhythms? Often in our day-to-day lives, we hear technical phrases and taxation terms that we recognize but do not clearly understand their implications. We either set our urge to hone our knowledge aside or brush them off as insignificant terms. Let us introduce a discipline of changing that, starting with a terminology that most of us are familiar with - Income Tax Return. To dive deeper, I will take you through its first type, named ITR-1.

ITR-1 is the most popular income tax return form.

ITR-1 applies to resident individuals with a total income of up to Rs 50 lakh from the following sources:

(i) Salaries

(ii) One-house property

(iii) Other interests from

a) Saving accounts

b) Deposits (Bank / Post Office / Cooperative Society)

c) Income Tax Refund

d) Enhanced Compensation and any other interest income

(iv) Agricultural income up to Rs 5,000

(v) Family pension

To understand the categories that apply to ITR-1 tax filing, let us decode all that does not apply. Remember that this blog aims to clear off the fog, confusion, and our tendencies to set aside the contexts. Getting aligned with the correct form for filing ITR is as necessary as filing the return. If an assessee operates the wrong form in filing their return, the return file will be regarded as a defective return and could activate a notice from the income tax department. Rule 12 of the Income-tax Rules, 1962 lists all such exceptions.

1) ITR-1 does not apply to consultancy services. Consultancy incomes are different from income from salary. Income from salary gets established with an employer-employee relationship. On the other end, retainer ship fees received for consultancy services include income received by the director of a company, in which case resident individuals cannot file their income tax returns in ITR-1.

2) The work-from-home era is upon us with promising lightning speed, passionate gush, flexibility, and expansiveness across the globe. The era has opened up a flurry of opportunities for many resident individuals to work from home in India with companies, projects, and campaigns abroad.

Please note that if any income comes from outside India, taxpayers need to file their income tax return in ITR-2 or ITR-3, not ITR-1.

3) Another high-yielding long-term avenue captures holding shares (assets inclusive of financial interest) in companies abroad. This brings us to another scenario that does not apply to ITR-1. In this case, resident individuals are required to declare particulars of the assets located outside India. Such a declaration cannot be made in ITR-1 and is obligated to get filed in IT-2 or ITR-3.

4) The sale of shares of any other capital asset will give rise to ‘income under the head capital gain’. There is no requirement in ITR-1 for the declaration of such income.

While holding listed shares does not mandate separate declaration, allowing the taxpayer to use ITR-1; in the year when such shares or any other capital assets (movable or immovable) get sold, the taxpayer will need to file their tax return in ITR-2 or ITR-3.

5) Which ITR form do we choose while holding unlisted equity shares?

Such a scenario arises in start-ups where employees get offered shares in the form of ESOPs. Now, since these shares are not listed, the department provides an additional section for reporting details of unlisted shares, which is not available in ITR-1. Such resident individuals ought to file their income tax return in ITR-2 or ITR-3 because holding unlisted equity shares calls for personal investment.

Another thing to keep in mind is that ITRs are annexure-less forms. Taxpayers are not required to attach documents (like proof of investment, and TDS certificates) along with their return, whether filed manually or electronically. Nevertheless, you must keep these documents for situations that might have tax authorities demand assessment or inquiry from you.

I hope you sought some clarity on the first type of ITR through numerous examples. We are on this journey of clearing off clouds together. I intend to take deeper dives into relevant taxation subjects that will not only render a sense of confidence in our decision-making but also help us leverage the best opportunities around us.