The Income Tax Department of India has notified all seven income tax return (ITR) forms for the assessment year 2025–26, introducing several changes aimed at simplifying compliance and broadening accessibility. Notably, salaried individuals with limited capital gains can now file simpler forms like ITR-1 and ITR-4, while new capital gains tax norms differentiate transactions before and after July 23, 2024. The threshold for disclosing assets and liabilities in ITR-3 has also been raised, easing the burden on middle-income taxpayers. These adjustments reflect a calibrated effort to align tax reporting with policy reforms and digital efficiency.
Streamlined Filing for Small Taxpayers: Changes to ITR-1 and ITR-4
The most significant shift in the newly notified ITR framework is the inclusion of long-term capital gains (LTCG) reporting within ITR-1 (Sahaj) and ITR-4 (Sugam). Traditionally, individuals earning LTCG—even marginally—had to resort to the more complex ITR-2.
Now, resident salaried taxpayers and small businesses under presumptive taxation, earning up to Rs. 1.25 lakh in LTCG from listed equities or mutual funds, can use ITR-1 and ITR-4 respectively. This measure is a step toward inclusivity and compliance simplicity, especially for those who invest modestly in capital markets.
This change is crucial because, under the Income Tax Act, LTCG up to Rs. 1.25 lakh is tax-exempt. Gains beyond this threshold are taxed at 12.5%.
Capital Gains Segmentation: Pre- and Post-July 23, 2024
Another policy-aligned amendment involves a structural shift in how capital gains are reported in forms ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7. In the newly updated Schedule Capital Gains section, taxpayers must now segregate capital gains based on whether they arose before or after July 23, 2024.
This date is pivotal—it marks the government’s policy change, announced in the 2024 Budget, to lower the LTCG tax on real estate assets from 20% (with indexation) to 12.5% (without indexation). Taxpayers who acquired properties before this date are given a choice: they can either opt for the new lower tax rate or retain the benefit of indexation and pay tax at the old rate.
This dual-option structure introduces flexibility, but also demands increased diligence in tracking transaction timelines and understanding the tax implications of each.
Higher Asset Disclosure Threshold in ITR-3
In a move aimed at easing compliance for entrepreneurs and professionals, the threshold for mandatory disclosure of assets and liabilities in Schedule AL of ITR-3 has been doubled—from Rs. 50 lakh to Rs. 1 crore.
This revision is especially significant for individuals and Hindu Undivided Families (HUFs) with business or professional income. By reducing the reporting burden, the government is acknowledging inflation-driven asset appreciation while simplifying tax obligations for middle-income earners.
Form-Wise Overview: Who Files What?
To better navigate the updated tax ecosystem, here’s a breakdown of the primary ITR forms and their applicable profiles:
- ITR-1 (Sahaj): For resident individuals earning up to Rs. 50 lakh from salary, one house property, interest income, and minimal agricultural income (up to Rs. 5,000).
- ITR-4 (Sugam): For individuals, HUFs, and firms (excluding LLPs) with business income under presumptive taxation and total income up to Rs. 50 lakh.
- ITR-2: For individuals and HUFs not engaged in business or profession but with income from capital gains or multiple house properties.
- ITR-3: For individuals and HUFs earning from business or professional services.
- ITR-5: For LLPs, firms, and cooperative societies.
- ITR-6: For companies registered under the Companies Act.
- ITR-7: For trusts, political parties, and charitable institutions (notified on May 11, 2025).
The deadline to file returns for individuals not subject to audit remains July 31, 2025.
Policy Implications and Takeaway
The 2025–26 assessment year’s ITR reforms are indicative of the government’s broader agenda—enhancing ease of compliance, reducing tax friction for average earners, and aligning tax structures with economic reforms. By simplifying returns for salaried and small business taxpayers and clarifying rules around capital gains taxation, the government is pushing for greater transparency and inclusivity.
However, these changes also require increased taxpayer awareness. The bifurcation of capital gains based on transaction dates and the nuanced tax treatment of real estate sales demand a proactive approach to record-keeping and tax planning.
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