ITR-1, ITR-2 or ITR-4: Choosing Correct Return Form for AY 2026-27

Selection of the correct return form is the first and most consequential decision in the return filing process. A return filed in a form that the taxpayer is not eligible to use is liable to be treated as defective under section 139(9) of the Income-tax Act, 1961, and if the defect is not cured within the time allowed, the return is treated as invalid — as if no return had been filed at all. Every year, a substantial proportion of defective return notices trace back not to computational errors but to a simple mismatch between the taxpayer’s income profile and the form selected. This article sets out the eligibility conditions, exclusions and finer distinctions between ITR-1 (Sahaj), ITR-2 and ITR-4 (Sugam) for AY 2026-27, based on the guidance published by the Income Tax Department on its e-filing portal.

Two preliminary points. First, the return for AY 2026-27 relates to income of FY 2025-26 and, notwithstanding that the Income-tax Act, 2025 has come into force from 1 April 2026, continues to be governed entirely by the Income-tax Act, 1961; the forms notified under the 1961 Act are to be used, with AY 2026-27 selected on the portal. Second, the filing utilities for ITR-1, ITR-2 and ITR-4 for AY 2026-27 have been released on the e-filing portal.

1. ITR-1 (Sahaj): the narrowest gate

ITR-1 is applicable only to an individual who is resident (other than not ordinarily resident) and whose total income does not exceed ₹50 lakh, drawn from the following sources:

• Salary or pension;
• One house property;
• Other sources (interest, family pension, dividend, etc.);
• Agricultural income up to ₹5,000; and
• Long-term capital gains under section 112A up to ₹1,25,000.

The inclusion of section 112A gains up to ₹1,25,000 — the amount corresponding to the exemption threshold under that section — remains the most significant relaxation in the form’s recent history. A salaried taxpayer whose only capital gain is long-term gain on listed equity shares or equity-oriented mutual funds within this limit need not migrate to ITR-2 for that reason alone.

The exclusions, however, deserve as much attention as the inclusions. As per the Department’s guidance, ITR-1 cannot be used by a person who:

(a) is a director in a company; (b) has any short-term capital gain; (c) has long-term capital gain under section 112A exceeding ₹1,25,000; (d) has held unlisted equity shares at any time during the previous year; (e) has any asset (including financial interest in any entity) located outside India; (f) has signing authority in any account located outside India; (g) has income from any source outside India; (h) is a person in whose case tax has been deducted under section 194N (TDS on cash withdrawals); (i) is a person in whose case payment or deduction of tax on ESOP has been deferred; (j) has any brought forward loss or loss to be carried forward under any head of income; or (k) has total income exceeding ₹50 lakh (excluding LTCG under section 112A up to ₹1,25,000).

Three nuances within this list are routinely overlooked in practice. First, the relaxation for capital gains extends only to long-term gains under section 112A; even a nominal short-term capital gain — for instance, ₹500 of gain under section 111A on a listed share sold within twelve months — renders the taxpayer ineligible for ITR-1 and pushes the return to ITR-2. Second, the brought-forward loss exclusion operates both ways: a taxpayer with section 112A gains within ₹1,25,000 who also has a brought forward capital loss to set off or carry forward cannot use ITR-1. Third, the section 194N exclusion applies irrespective of the amount involved; a single TDS entry under section 194N in Form 26AS makes ITR-1 unavailable, since the form does not support the credit mechanism for that section.

2. ITR-2: the residual form for non-business income

ITR-2 is applicable to individuals and Hindu Undivided Families having income under any head other than “Profits and Gains of Business or Profession”, who are not eligible to file ITR-1. It is, in substance, the residual form for all non-business taxpayers.

The following situations, each of which disqualifies ITR-1, are accommodated in ITR-2:

• Total income exceeding ₹50 lakh;
• More than one house property;
• Capital gains of any nature — short-term gains, long-term gains under section 112, and section 112A gains exceeding ₹1,25,000;
• Directorship in a company or holding of unlisted equity shares;
• Foreign assets, foreign income or signing authority in a foreign account, together with the corresponding Schedule FA disclosures;
• Non-resident or resident-but-not-ordinarily-resident status;
• Agricultural income exceeding ₹5,000; and
• Brought forward or carry forward losses under any head.

The one boundary ITR-2 cannot cross is business or professional income. A taxpayer with even a modest amount of freelance or professional income assessable under the head “Profits and Gains of Business or Profession” must move to ITR-3 (or, where the presumptive scheme applies and the other conditions are satisfied, ITR-4). A frequent error in this context is the reporting of professional receipts as “income from other sources” in ITR-2 solely to avoid the business schedules; where the activity is in the nature of a profession or vocation, this classification is incorrect and invites scrutiny, particularly when the corresponding TDS appears under section 194J.

3. ITR-4 (Sugam): the presumptive taxation form

ITR-4 is applicable to an individual or HUF who is resident (other than not ordinarily resident), and to a firm (other than an LLP) which is resident, having income from business or profession computed on a presumptive basis under section 44AD (eligible business), section 44ADA (specified professions) or section 44AE (goods carriages), together with income from the following sources, subject to total income not exceeding ₹50 lakh:

• Salary or pension;
• One house property;
• Other sources;
• Agricultural income up to ₹5,000; and
• Long-term capital gains under section 112A up to ₹1,25,000.

The exclusion list for ITR-4 substantially mirrors that of ITR-1: directorship, any short-term capital gain, section 112A gains exceeding ₹1,25,000, unlisted equity shares, foreign assets, foreign signing authority, foreign income, deferred ESOP tax, brought forward or carry forward losses, and total income exceeding ₹50 lakh each render the form unavailable. One distinction is noteworthy: the section 194N exclusion, which appears in the ITR-1 list, does not appear in the Department’s exclusion list for ITR-4 — a relevant point for proprietors with substantial cash withdrawals from business accounts.

Two structural features of ITR-4 merit emphasis.

ITR-4 is optional, not mandatory. The Department’s guidance expressly states that Sugam is a simplified form available at the option of an assessee eligible for the presumptive scheme. An eligible taxpayer may instead file ITR-3 with complete business particulars. In practice, ITR-3 is preferable where the taxpayer wishes to declare income below the presumptive rate (which requires books and, where applicable, audit), has capital gains outside the narrow ITR-4 window, or has losses to carry forward.

The regime selection procedure differs for business taxpayers. For non-business taxpayers (typically ITR-1 and ITR-2 filers), the option to move between the default new tax regime under section 115BAC and the old regime can be exercised every year directly in the return, provided the return is filed within the due date under section 139(1). For taxpayers with business or professional income (typically ITR-4 and ITR-3 filers), opting out of the default regime requires Form 10-IEA to be furnished on or before the section 139(1) due date, and re-entry into the new regime thereafter is permitted only once in a lifetime. An ITR-4 filer intending to remain in the old regime must therefore attend to Form 10-IEA before filing, failing which the return is processed under the new regime.

4. Comparative summary of ITR-1 (Sahaj), ITR-2 or ITR-4 (Sugam)

5. Consequences of an ITR incorrect selection and the corrective route

Where a return is filed in an ineligible form, the Assessing Officer (in practice, CPC) may treat it as defective under section 139(9) and call upon the taxpayer to rectify the defect within the period specified in the notice. Failure to rectify renders the return invalid.

Where the taxpayer discovers the error independently, the appropriate course is a revised return under section 139(5) in the correct form. For AY 2026-27, a revised return may be furnished before 31 March 2027 or before completion of assessment, whichever is earlier. It should, however, be noted from the Department’s validation rules for AY 2026-27 that a revised return furnished after 31 December 2026 attracts a fee under section 234-I of ₹1,000 where total income does not exceed ₹5 lakh and ₹5,000 in other cases — an additional reason to complete the form-selection exercise correctly in the first instance.

6. A working sequence for ITR form selection

The selection exercise reduces to four questions, answered in order. First, is there any income assessable under the head “Profits and Gains of Business or Profession”? If yes, the choice lies between ITR-4 (presumptive, resident, within the ₹50 lakh ceiling and free of the listed disqualifications) and ITR-3; ITR-1 and ITR-2 are excluded outright. Second, if there is no business income, does any single disqualification in the ITR-1 list apply — residential status, a second house property, any short-term gain, section 112A gains beyond ₹1,25,000, foreign assets, section 194N TDS, losses, or income above ₹50 lakh? If yes, the form is ITR-2. Third, if none applies, ITR-1 is available. Fourth, in every case, the AIS, Form 26AS and the previous year’s return should be reviewed before finalising the selection — a solitary 194N entry, an ESOP deferral or a carried-forward loss from the earlier return is precisely the kind of detail that converts an apparently simple Sahaj case into an ITR-2 filing.

The eligibility conditions summarised above are as published on the Income Tax Department’s e-filing portal for AY 2026-27, and reference may be made to the notified forms, Rule 12 of the Income-tax Rules, 1962 and the relevant CBDT notifications for the complete text.

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Disclaimer: The contents of this article are for general informational purposes only and do not constitute professional advice. Readers are advised to consult a qualified professional before acting on any information contained herein. The author accepts no liability for any loss or damage arising from reliance on this article. The views expressed are personal.