ITR-1 vs ITR-2: Understanding the Difference and Choosing the Right Tax Form

Filing your income tax return in India requires using the correct ITR form. Selecting and filing an incorrect form may delay in the tax filing and refund (if applicable) process or a notice from the Income Tax department. One of the most common questions among first-time tax filers is which form to choose -  ITR-1 or ITR-2? 

In this comprehensive guide, we’ll explain what each of these forms is for, highlight the key differences between ITR-1 and ITR-2, and help you decide which form fits your situation. 

What is ITR-1 (Sahaj)?

ITR-1 or Sahaj is the most basic Income Tax Return form for individual taxpayers in India. It is designed for resident individuals with relatively straightforward incomes. You can use ITR-1 only if all the following conditions are satisfied:

• Income Sources: Your income is from salary or pension, one house property, and/or other sources like bank interest or dividends. (Note: Certain incomes under "other sources" that need special treatment, such as lottery winnings or horse race income, are not allowed in ITR-1)
• Agricultural Income (if any): Up to ₹5,000 of agricultural income is permitted under ITR-1. If your agricultural income exceeds ₹5,000, you must opt for a different form (such as ITR-2).
• Total Income Limit: Your total annual income must not exceed ₹50 lakh. ITR-1 is meant for people with income up to ₹50 lakh; higher incomes require a more detailed form.
• Residential Status: You must be an Indian resident (ordinarily resident) for the applicable financial year. Non-resident Indians (NRI) or those with RNOR status (Resident but Not Ordinarily Resident) cannot use ITR-1.
• Taxpayer Category: Only individuals can file ITR-1. It cannot be used by Hindu Undivided Families (HUFs) or any other type of taxpayer. Also, if you are a director in a company or have held unlisted equity shares during the year, you are not eligible for ITR-1.

Because of these restrictions, ITR-1 is suitable for a salaried employee or pensioner with no other significant income sources (aside from interest, etc.), who owns at most one house property and has no complex investments. It is a simplified form – much of the information may be pre-filled on the e-filing portal, and it requires relatively minimal detail compared to other ITRs. For example, you won't have to provide detailed breakdowns of capital gains or foreign assets because those situations simply don't apply for ITR-1 filers.

New for AY 2025-26

One important update is that ITR-1 now allows certain capital gains in limited cases. Starting FY 2024-25, taxpayers can report long-term capital gains (LTCG) up to ₹1.25 lakh from listed equity shares or equity mutual funds (under Section 112A) within ITR-1 itself. This change aligns with Budget 2024’s increase of the LTCG tax exemption threshold from ₹1 lakh to ₹1.25 lakh.

In previous years, any amount of capital gains would disqualify you from using ITR-1, even if the gain was tax-exempt. Now, if your only capital gains are modest (within ₹1.25 lakh) from stock or equity MF investments and you have no carry-forward losses, you can still file ITR-1. However, if your capital gains exceed ₹1.25 lakh or are from other assets (property, gold, etc.), or if you have short-term capital gains or any carried-forward losses, then ITR-1 is not applicable – you must use ITR-2 in such cases.

What is ITR-2?

ITR-2 is the Income Tax Return form intended for individuals and HUFs who have a more complex income situation. In other words, ITR-2 covers all kinds of income that ITR-1 does, and more, except it does not cover business/professional income. You should file ITR-2 if any of the following apply to you:

• You earn income from salary/pension and other sources, and/or you have income from more than one house property. (Multiple properties cannot be reported in ITR-1)
• You have made capital gains during the year – for example, profit from selling stocks, mutual funds, real estate, etc. Any amount or type of capital gains (short-term or long-term, any amount beyond the small exception allowed in ITR-1) mandates the use of ITR-2.
• You have any foreign income or foreign assets. For instance, if you earned dividends from foreign shares, have a bank account abroad, or own property overseas, you must use ITR-2. (ITR-1 does not allow reporting of foreign assets/income at all.)
• Your total income exceeds ₹50 lakh in the year. High-income earners (above ₹50L) need to file ITR-2 (or ITR-3/4 if applicable) because ITR-1 has an income cap.
• Your residential status is NRI or RNOR, or you are an Ordinary Resident with additional circumstances that bar ITR-1. Non-resident Indians and not-ordinarily-residents cannot use ITR-1 and thus fall back on ITR-2 (provided they don’t have business income).
• You are an HUF (Hindu Undivided Family). HUFs are not allowed to file ITR-1, but they can file ITR-2 if they have no business income.
• You had certain special circumstances in the year, such as being a director in a company, or you invested in unlisted equity shares, or had income from lottery/horse racing or crypto assets, etc. These make your situation ineligible for ITR-1 and push you to ITR-2 or beyond. For example, being a company director or holding unlisted shares automatically disqualifies you from ITR-1, so you would use ITR-2 (if no business income). Similarly, winning a lottery or having taxable crypto trading gains would require ITR-2 since those are not covered under ITR-1’s scope.

In summary, ITR-2 is for taxpayers with multiple or diverse income streams (except business income). It covers salary, pensions, multiple house properties, capital gains of any size, foreign assets/income, dividends, interest, higher agricultural income, etc., all in one form.

Both residents and non-residents can use ITR-2, and it applies to individuals as well as HUFs. The form is naturally more detailed than ITR-1. When filing ITR-2, you'll notice additional schedules for capital gains, etc., and the income tax e-filing portal will prompt you to provide details (e.g., purchase and sale dates for assets in case of capital gains) which are not needed for ITR-1. This added complexity is the trade-off for covering more complex income scenarios.

Note: If you have income from a business or profession, you cannot use either ITR-1 or ITR-2. Such income falls under ITR-3 (or ITR-4 if you are under presumptive taxation). ITR-2 is strictly for those with no business/professional income.

Key Differences Between ITR-1 and ITR-2

Let’s break down the major differences between ITR-1 and ITR-2 in a concise way. Although both forms are for individuals (and ITR-2 also for HUFs) and cover personal income, they differ in terms of who can use them and what income can be reported. Here are the key points of distinction:

• Taxpayer Eligibility & Status: ITR-1 is available only to resident individuals (Ordinary Residents of India). It cannot be used by Non-Resident Indians or Not-Ordinarily Residents – those taxpayers must file ITR-2 or other applicable forms.
  
  Likewise, HUFs are not permitted to use ITR-1. ITR-2, on the other hand, can be used by a broader set of taxpayers: it accepts filings from individuals (residents, NRIs, RNORs) as well as HUFs. In short, if you’re not a plain resident individual (or if you represent an HUF), you’re out of ITR-1 territory and into ITR-2.
• Income Ceiling: ITR-1 has an income limit of ₹50 lakh total income. If your total taxable income for the year is more than ₹50,00,000, you cannot use ITR-1. Such taxpayers will need to use ITR-2 (or another appropriate form) because ITR-2 has no upper income limit – it can handle incomes above ₹50 lakh without issues. For example, a salaried individual earning ₹75 lakh must go with ITR-2 since ITR-1 caps out at ₹50 lakh.
• Allowed Income Sources: ITR-1 only supports specific income sources, namely salary or pension, one house property, and income from other sources like interest, dividends, etc. It also allows a small amount of farm income (as noted, up to ₹5,000). Crucially, ITR-1 explicitly excludes certain categories even within these heads – for instance, income from lotteries or horse race winnings is not allowed in ITR-1 (despite being "other sources", they require a different form due to special tax rates). ITR-2 covers all the income sources that ITR-1 does and more. With ITR-2, you can report salary, multiple house properties, capital gains, foreign income, larger agricultural income, interest/dividends, and so on. Essentially, any income except business or professional income can be handled in ITR-2. This means if you have two or more houses (rental or self-occupied), or any capital gains or foreign assets, you’ll need to go with ITR-2, not ITR-1.
• Capital Gains Reporting: Perhaps the biggest difference is around capital gains. ITR-1 (until recently) did not allow any capital gains reporting – anyone who sold stocks, mutual funds, or property had to switch to ITR-2. Now, there is a partial relaxation: from FY 2024-25 onward, ITR-1 does permit reporting of long-term capital gains (LTCG) up to ₹1.25 lakh from listed equity shares or equity mutual funds (Section 112A) within the form. This means if you made only a small amount of equity gains (within ₹1.25L and STT paid), you can still use ITR-1 without being forced into ITR-2. However, this is the only exception. Any other capital gains – for example, short-term capital gains (STCG) on stocks or mutual funds, LTCG above ₹1.25 lakh, or gains from other assets like real estate, gold, bonds, etc. – cannot be filed in ITR-1. If you have those, you must use ITR-2, which supports all types and amounts of capital gains.
  
  Also, ITR-1 does not allow carrying forward or setting off capital losses. So if you incurred capital losses (say a stock market loss you want to carry forward), ITR-1 is not applicable. In summary: ITR-1 can only handle very limited capital gains scenarios, whereas ITR-2 has the full-fledged Schedule for Capital Gains. Even if your salary is within ₹50L, having capital gains above ₹1.25L automatically requires ITR-2 – using ITR-1 in that case will trigger a defective return notice from the tax department.
• Foreign Assets and Foreign Income: ITR-1 does not allow any disclosure of foreign assets or foreign-sourced income. If during the year you had, for example, interest from a bank account in another country, rental income from a property abroad, or simply maintained foreign assets (like stocks or deposits overseas), you cannot file ITR-1. ITR-2 is the proper form for anyone with foreign assets or income. This is also tied to the residency point: typically, NRIs or returning NRIs (RNORs) often have foreign income or assets, hence they fall under ITR-2 by default. All foreign asset reporting (such as Schedule FA) is included in ITR-2, not in ITR-1.
• Special Status and Other Situations: There are a few specific scenarios that automatically distinguish the forms:
  
  - If you are a Director in a company, or you held unlisted equity shares anytime during the year, you cannot use ITR-1 (even if your income is just salary). Such individuals should use ITR-2 (or ITR-3 if they also have business income).
  
  - If you have income from winning lotteries, game shows, betting, or horse racing, etc., these are taxed at special rates under "income from other sources." These incomes are not to be reported in ITR-1. The presence of such income pushes you to ITR-2 or beyond.
  
  - If you have agricultural income exceeding ₹5,000, ITR-1 is not applicable (it only allows up to ₹5k). So e.g. ₹50,000 of farm income means you should file ITR-2.
  
  - If you have clubbed income (for example, you need to club a minor child's income or spouse’s income with yours as per tax laws), and that clubbed income falls under categories not allowed in ITR-1, you’d have to use ITR-2. A common case is when a spouse’s or minor’s income (like interest or capital gains) needs to be reported – if that includes, say, a capital gain or another house property, ITR-2 is necessary. (ITR-2 explicitly has provisions to report clubbing of income, whereas ITR-1 is not equipped for that scenario)
• Complexity and Filing Process: ITR-1 is simpler and shorter. It has fewer schedules and fields to fill. In fact, when filing ITR-1 online on the income tax portal, much of the information (salary, TDS, interest, etc.) is pre-filled – you mainly need to verify and enter the remaining details before submission.
  
  ITR-2 is more complex and detailed. While it also provides pre-filled data for many fields, it will prompt you to answer additional questions (especially at the start of the form) and requires detailed inputs for certain incomes.

Which Form Should You Use? – Choosing the Right ITR

By now, you might already know which form sounds like the right fit for you. But to make it absolutely clear, let's summarize when to choose ITR-1 and when to go with ITR-2. Filing the proper form ensures your return is processed smoothly and you stay compliant with tax rules. Here’s how to decide:

Use ITR-1 (Sahaj) if all of the following apply to you:

• Resident Individual with <= ₹50L Income: You are an Indian resident individual (not an NRI or HUF) and your total taxable income for the year does not exceed ₹50,00,000.
• Simple Income Sources: Your income is only from salary and/or pension, interest or dividends, and at most one house property. You do not have more than one property or any business or professional income.
• No Large Capital Gains: You have only a small long-term capital gain (LTCG) from equity investments up to ₹1.25 lakh which is tax-exempt. In other words, if you sold some shares or equity mutual funds and your gain is within ₹1.25 lakh (and you have no capital losses to report), you can still use ITR-1. But if you realized bigger gains or any short-term gains, this condition fails and you should move to ITR-2.
• No Foreign or Other Special Incomes: You do not have any foreign income or assets to declare. You also don’t have special incomes like taxable lottery winnings, crypto asset gains, etc., that are outside ITR-1’s purview.
• Not a Director/Shareholder: You did not serve as a director in any company and did not hold any unlisted equity shares during the year (these are disallowed in ITR-1).
• Agricultural Income ≤ ₹5,000: If you have any agricultural income, it is minimal (₹5,000 or less).

If all the above are true, ITR-1 is sufficient and indeed the easiest form for you. For example, a resident salaried employee earning ₹10 lakh with interest income and owning one apartment would file ITR-1. The form will be quick to fill and mostly pre-populated.

Use ITR-2 if any of the following apply to you:

• You have any income or situation not covered by ITR-1. In practice, this means: 

  - Multiple Houses: You own more than one house property (even if one is vacant or there’s a loss on it). 

   

  - High Income: Your total income exceeds ₹50 lakh in the year. 

   

  - Capital Gains: You earned capital gains (short-term or long-term, of any amount above the small exemption) from selling stocks, mutual funds, property, etc. Note: Even if your salary is under ₹50L, a capital gain > ₹1.25L means ITR-2 is needed. 

   

  - Foreign Assets/Income: You have any foreign assets, foreign bank accounts, or income from abroad in the year. 

   

  - Director/Unlisted Equity: You were a company director or held unlisted shares of a company/startup. 

   

  - Agricultural Income > ₹5,000: Your farm income is more than ₹5,000.

   

  - Non-Resident or HUF: You are filing on behalf of an HUF, or you are an NRI/RNOR individual. 

   

  - Others: You have income to club (e.g. child's income), or special incomes like lottery/crypto winnings, etc., that disqualify ITR-1.