What are ITR-2 and ITR-3 and who can file them while filing their return?

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Filing income tax return in India may get confusing with so many ITR forms to choose from. While ITR-1 by itself can be filed by salaried tax payers with no other income, taxpayers with a more complex financial history—capital gains, more than a single property, foreign assets, or income from business—will have to consider other forms. Two of them are ITR-2 and ITR-3, both of which are for individuals and Hindu Undivided Families (HUFs) with income over the normal.

Selecting the incorrect ITR form can render your return "defective" in the view of the Income Tax Department, and you could have to re-file it or even get penalized. That's why it's crucial to know what each form is used for and for whom. Here's a detailed breakdown of ITR-2 and ITR-3 so you can make the correct decision according to your source of income.

ITR-2 is for individuals and Hindu Undivided Families (HUFs) who have no income from business or profession. If you have income from salary or pension and have capital gains—such as selling stocks, mutual funds, or immovable property—you have to use ITR-2. You can use this form if you have an income from more than one house property, foreign assets or income, are a director of a company, or have shares in unlisted companies. But if you have any income from any profession or business, even freelancing, you cannot use this form.

ITR-2 is most appropriate for taxpayers with a financial situation comprising investments and property but not entrepreneurial or freelance activities. It has elaborate disclosures to report various forms of non-business income and therefore is a complete filing choice for investors and high net-worth individuals.

ITR-3 is for individuals and HUFs earning income from profession or business. It would be self-employed professionals like doctors, lawyers, architects, or consultants, and even those running a small business. Even self-employed individuals earning irregular freelance income or income from speculative business, futures and options, or intraday equity trading are to file ITR-3.

Such income enables you to report business profits and losses, balance sheets, and report work expenses. It also supports other sources of income such as salary, house property, or capital gains—but what makes it different from others is the need to report income from any business or profession, whether small or large.

Filing with the wrong ITR form will land you in trouble. The Income Tax Department can consider the return as defective under Section 139(9) and request you to file it again within a specified time period. Failure to do so will attract penalties and even invalidate your return, with negative implications on your tax compliance record.

People who receive income from two or more sources—specifically those with investment income or moonlighting work—must be careful and see whether their income stream involves ITR-2 or ITR-3 filing. Even small-scale freelancing or trading can force them to file ITR-3.

ITR-2 can be adopted by an individual with more than one source of income other than profession or business, while ITR-3 has to be adopted by any individual with income from business, profession, or commerce. Choosing the right form will render your income tax return valid, complete, and without delay. In case of doubt, take the opinion of a tax consultant to avoid expensive mistakes.