Decoding ITR-2: A Practical Handbook for Taxpayers

Decoding ITR-2: A Practical Handbook for Taxpayers

Income tax returns are crucial for taxpayers, as they provide a systematic approach for reporting their income, claiming deductions and exemptions, determining tax liability, and ensuring compliance with the Income Tax Act. If a taxpayer is an HUF or an individual whose total income is more than Rs 50 lakhs, they cannot file ITR 1 and have to go for ITR-2.

Latest Update

The Income Tax Department has enabled the online and Excel utility-based filing of the ITR-2 form for FY 2025-26. Taxpayers can now file ITR-2 through the Income Tax e-filing Portal.

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Key Features of ITR-2:

It covers salary and pension income. (Both Individual and HUF)
It covers capital gains or losses on the sale of investment or property (both short-term and long-term).
It also covers income from other sources (including winning from the lottery, bets on racehorses, and other legal gambling).
ITR-2 also includes foreign asset schedules to report the foreign asset & income.
In ITR-1, income from two house properties (w.e.f FY 25-26) is allowed, but in ITR-2, income from more than two house properties is allowed.
It can also be filled by RNOR (Resident Not ordinary resident) & NR (Non-Resident)

Who Cannot File ITR-2?

Those who have an income from business and profession.

Difference between ITR-1 and ITR-2:

Particulars	ITR-1 (Sahaj)	ITR-2
Eligible Taxpayers	Resident Individuals	Individuals and HUFs
Income Limit	Total income up to Rs. 50Lakhs	No such limit
More than two house property	Not allowed	Allowed
Capital Gains Income	Not allowed	Allowed
Foreign Assets/Foreign Income	Not allowed	Allowed
Agriculture Income	Up to Rs.5000 only	More Than Rs.5000 also allowed
Director In Company	Not allowed	Allowed
Unlisted Equity Shares	Not allowed	Allowed
Resident Status	Only Resident (Ordinarily Resident)	Resident, Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR)

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Key Updates in ITR-2 for AY 2026-27 (FY 2025-26):

Capital Gain Bifurcation: Share transactions must be reported separately, whether they occurred before or after July 23, 2024, till the last FY, but now they’re irrelevant for FY 25-26, hence such fields are abolished.
Asset & Liability Threshold Raised: Only taxpayers who have an income above Rs.1 Cr need to declare assets and liabilities.
Revised Capital Gains Tax Rates:

STCG under Section 111A is now taxed at 20% and LTCG under Section 112A at 12.5%, effective from July 23, 2024, per Budget 2024 changes.

Note: Assessed eligible for ITR 1 can also file ITR 2, but it’s advisable to avoid unnecessary reporting requirements to be filled in ITR 2

Common Mistakes to Avoid

Reporting only salary income and ignoring Capital gain transactions leads to ITR-1 being filed incorrectly
Not reconciling capital gains with AIS: mismatches trigger scrutiny notices
Forgetting to disclose Schedule FA, even if no income from foreign assets
Selecting the wrong regime (old vs new) without computing the comparative tax
Not e-verifying within 30 days of filing
Missing the carry-forward opportunity for capital losses by filing late.