ITR-1 (Sahaj) Restrictions: Income Sources Not Allowed & Filing Rules

With just a few days left before the 15 September 2025 deadline for filing Income Tax Returns (ITRs) for Assessment Year (AY) 2025-26, many taxpayers are rushing to submit their forms online. For millions of individual taxpayers, the default option often is ITR-1 (Sahaj), the simplest form available on the income-tax portal. It is designed for those with straightforward income, mostly salary, a single house property, and interest from deposits.

But here’s where many go wrong: not all income types can be reported in ITR-1. If you use it despite being ineligible, your return could be marked as defective, delaying refunds or even leading to notices from the Income Tax Department. With the clock ticking, knowing exactly what is allowed and what is not under ITR-1 is critical.

Before we get into the sources that cannot be filed under ITR-1, let’s do a quick recap of who is eligible to use this form.

Who Can File ITR-1? Eligibility Criteria for AY 2025-26

As per the Income-tax Department’s revised guidelines for AY 2025-26:

1. Resident Individuals only (not NRIs or RNORs)

2. Total income up to ₹50 lakh in a financial year

3. Income should be from the following limited sources:

•  Salary or Pension (including allowances and perquisites)
• One House Property (self-occupied or let-out; not more than one)
• Other Sources (interest from savings accounts, fixed deposits, recurring deposits, family pension, etc.)
• Agricultural income up to ₹5,000

New Relaxation on ITR for AY 2025-26

Long-Term Capital Gains (LTCG) under Section 112A up to ₹1.25 lakh (from listed equity shares or equity mutual funds) can now also be reported in ITR-1, provided there are no capital losses to carry forward.

Key takeaway: ITR-1 is valid only for simple income situations. The moment you cross the ₹50 lakh limit, earn from multiple houses, run a business, or have foreign income, you must shift to another ITR form.

Income Sources Not Allowed in ITR-1 (Sahaj)

While ITR-1 is designed for simplicity, it comes with strict restrictions. If you fall into any of the categories below, you cannot file using ITR-1.

1. Business or Professional Income

• Any income from freelancing, consultancy, small business, or professional services makes you ineligible
• Correct form: ITR-3 (detailed disclosure) or ITR-4 (presumptive taxation)

2. Multiple House Properties

• Owning more than one house property (even if vacant or deemed let-out) is not permitted in ITR-1
• Correct form: ITR-2

3. Capital Gains (with limited exception)

• Short-Term Capital Gains (STCG) from shares, property, or any asset are not allowed
• Long-Term Capital Gains (LTCG) other than Section 112A equity/MF gains up to ₹1.25 lakh are not allowed
• If LTCG u/s 112A exceeds ₹1.25 lakh, or if you have losses to carry forward, ITR-1 cannot be used
• Correct form: ITR-2

4. Agricultural Income above ₹5,000

• If agricultural income exceeds ₹5,000, ITR-1 is invalid
• Correct form: ITR-2

5. Foreign Assets or Foreign Income

• If you own any foreign bank accounts, shares, property, or earn income abroad, ITR-1 is not permitted
• Correct form: ITR-2

6. Directorship or Unlisted Shares

• If you were a Director in a company or held unlisted equity shares during the year, you cannot file ITR-1
• Correct form: ITR-2

7. Winnings from Lottery, Racehorses, Gambling, or Online Games

• Income taxable at special rates under Sections 115BB or 194B/194BB cannot be shown in ITR-1
• Correct form: ITR-2/3 depending on other income

8. Income under Section 5A

• If income has to be apportioned under the Portuguese Civil Code (Goa, Daman & Diu cases), ITR-1 cannot be used
• Correct form: ITR-2 or ITR-3 as applicable

9. Special TDS / ESOP Cases

• If tax has been deducted u/s 194N (cash withdrawal tax), ITR-1 is invalid
• If you opted for deferred tax on ESOPs from eligible startups, you cannot file ITR-1.
• Correct form: ITR-2 or ITR-3

10. Losses to Carry Forward or Set-off

• ITR-1 does not allow reporting brought forward losses (like house property loss, capital loss) or carrying them forward
• Correct form: ITR-2/3

11. Non-Residents & High-Income Individuals

• Non-Resident Indians (NRIs) or Residents but Not Ordinarily Residents (RNORs) cannot file ITR-1
• Individuals with total income above ₹50 lakh also cannot file ITR-1

Important Reminder:

The only new inclusion from AY 2025-26 is that LTCG up to ₹1.25 lakh u/s 112A can be shown in ITR-1. Other than this, all older restrictions continue. Filing wrongly under ITRs will make your return defective, delaying refunds and possibly leading to notices.

ITR-1 vs Other ITR Forms: Quick Comparison

Why Filing Under the Wrong Form is Risky?

Choosing ITR-1 when you’re ineligible isn’t a harmless mistake—it can cause real problems:

1. Defective Return (Section 139(9))

• If your income profile doesn’t match ITR-1, the department can mark your return as defective. You’ll then need to file a fresh ITR in the correct form, losing valuable time as the deadline closes in.

2. Refund Delays

• A mismatched form often stalls refund processing. Many taxpayers end up waiting months simply because they chose ITR-1 incorrectly.

3. Tax Notices

• Incorrect disclosure can trigger automated scrutiny notices. With new data-matching via AIS (Annual Information Statement), discrepancies are spotted instantly.

4. Penalties

• Filing late (after 15th September 2025) can attract late fees of up to ₹5,000 (Section 234F), and interest on unpaid tax (Sections 234A/B/C). If you already risk rejection, late filing only compounds the problem.