Your Guide to the ITR Forms 1–7 for AY 2025–26: Key Changes to Know

The Central Board of Direct Taxes (CBDT) has notified the Income Tax Return (ITR) Forms 1 to 7 for the Assessment Year (AY) 2025–26, applicable for income earned from April 1, 2024, to March 31, 2025. Unlike the early releases in previous years (typically by March), this year’s forms arrived with a delay of over a month, raising hopes for an extended filing deadline.

This expectation stems from past High Court directives urging the CBDT to ease taxpayer burdens when filing utilities are delayed. Let’s explore the major updates in these forms to help you navigate tax season with confidence.

1. Simplified Filing for Small Capital Gains

A standout change is the eased eligibility for ITR-1 and ITR-4, particularly for taxpayers with long-term capital gains (LTCG) under Section 112A. The Finance Act (No. 2), 2024, increased the LTCG exemption limit from ₹1,00,000 to ₹1,25,000 for gains from listed equity shares, equity mutual funds, or business trust units. Previously, even non-taxable LTCG within the exemption limit forced taxpayers to use the more complex ITR-2 or ITR-3 forms, creating unnecessary hassle.

Now, the CBDT has updated Rule 12 of the Income-tax Rules, 1962, allowing salaried individuals (eligible for ITR-1) and small business owners (eligible for ITR-4) to stick with these simpler forms if their LTCG under Section 112A is up to ₹1,25,000, provided there’s no brought-forward or carry-forward capital loss. This change is a game-changer for small taxpayers, streamlining compliance.

2. Aadhaar Enrolment ID Dropped

The Finance (No. 2) Act, 2024, amended Section 139AA, effective October 1, 2024, to eliminate the use of Aadhaar Enrolment IDs for PAN applications and ITR filings. All ITR forms (1–7) will now require the Aadhaar number of the taxpayer or relevant parties (e.g., partners, trustees, or beneficiaries). This update aligns with stricter regulations, ensuring seamless verification.

3. Detailed Opt-Out Disclosures for the New Tax Regime

For ITR-3, ITR-4, and ITR-5 filers, reporting requirements for opting out of the new tax regime under Section 115BAC have been enhanced. Previously, these forms only asked if the taxpayer opted out and required Form 10-IEA details. The new forms now seek confirmation of past Form 10-IEA filings and whether the taxpayer wishes to continue opting out for AY 2025–26, improving clarity and compliance.

4. New Presumptive Tax Scheme for Cruise Ships

The Finance (No. 2) Act, 2024, introduced Section 44BBC, a presumptive tax scheme for non-residents operating cruise ships, effective from AY 2025–26. Under this scheme, 20% of the total amount received for passenger carriage is deemed as taxable profits. ITR-3, ITR-5, and ITR-6 now include fields in Part A-GEN to indicate Section 44BBC income and updates to Schedule BP for reporting these profits, similar to other presumptive schemes like Sections 44B and 44BBA. Notably, tax audits under Section 44AB may not be required for Section 44BBC, aligning with Section 44B treatment.

5. Capital Gains Tax Overhaul

The Finance (No. 2) Act, 2024, reshaped capital gains taxation from July 23, 2024, impacting ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7. The date of asset transfer is critical:

• Before July 23, 2024: Old rates apply—15% for short-term capital gains (STCG) under Section 111A, 20% for LTCG under Section 112 with indexation, and 10% for LTCG under Section 112A.
• On or after July 23, 2024: New rates include 20% for STCG under Section 111A, 12.5% for LTCG under Sections 112 and 112A (without indexation, except for pre-July 23, 2024, land/building transfers for residents), and updated non-resident rates.

The new ITR forms require taxpayers to report the transfer date and apply the correct tax rates, ensuring accurate calculations.

6. Unlisted Bonds and Debentures as STCG

The Finance (No. 2) Act, 2024, expanded Section 50AA to include unlisted bonds and debentures from July 23, 2024. Gains from their transfer, redemption, or maturity are now taxed as STCG, regardless of holding period, unlike pre-July 23 transfers, which could qualify as LTCG. ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7 reflect these changes for accurate reporting.

7. Buy-Back Proceeds as Deemed Dividends

From October 1, 2024, buy-back proceeds from domestic companies are taxed as deemed dividends under Section 2(22)(f) in shareholders’ hands, reversing the earlier Section 115QA tax on companies. ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7 now require reporting from these proceeds in Schedule OS (dividend income) with nil consideration in Schedule CG, resulting in a notional capital loss.

8. Removal of Section 80-IC Deduction Schedule

Since the deduction period for Section 80-IC (for manufacturing units started or expanded between 2003 and 2012) ended by AY 2021–22, the related schedule has been removed from ITR-3, ITR-5, and ITR-6, streamlining the forms.

9. Enhanced Disability Deduction Reporting

ITR-2 and ITR-3 now allow taxpayers claiming deductions under Sections 80DD (dependent disability) or 80U (personal disability) to report disability certificate numbers for all disability types, not just Form 10-IA for autism, cerebral palsy, or multiple disabilities, improving documentation accuracy.

10. Pass-Through Income Reporting

ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7 now include Section 115U in Schedule PTI, enabling investors in venture capital funds/undertakings to report pass-through income, addressing a previous gap.

11. Expanded Audit Disclosure in Schedule 5A

For ITR-3, Schedule 5A now requires disclosure of whether a spouse’s accounts (under the Portuguese Civil Code) are audited under any Income-tax Act provision (excluding Section 92E) or other laws, broadening the scope beyond Section 44AB.

12. Higher Threshold for Schedule AL

Schedule AL in ITR-2 and ITR-3, which reports assets and liabilities, now applies only to taxpayers with total income exceeding ₹1 crore, up from ₹50 lakh, reducing the reporting burden.

13. TDS Section Disclosure

All ITR forms (1–7) now require specifying the section under which Tax Deducted at Source (TDS) was applied in the Tax Payment schedule, enhancing reporting precision.

14. Reporting Profits from Raw Diamond Sales

For foreign companies selling raw diamonds in notified special zones, new Safe Harbour Rules (Rules 10TI–10TIC) deem 4% or more of gross receipts as taxable profits. ITR-6’s Schedule BP now captures this income, with taxpayers filing Form No. 3CEFC to opt in.

Who Can Use Which ITR Form?

Here’s a snapshot of ITR form applicability for AY 2025–26:

• ITR-1 (Sahaj): For ordinarily resident individuals with salary, one house property, family pension, or LTCG up to ₹1,25,000 under Section 112A, with total income up to ₹50 lakh.
• ITR-4 (Sugam): For ordinarily resident individuals, HUFs, or firms (excluding LLPs) with presumptive business income (Sections 44AD, 44ADA, 44AE), salary, or LTCG up to ₹1,25,000.
• ITR-2 and ITR-3: For complex incomes like multiple properties, foreign assets, or business income (ITR-3).
• ITR-5, ITR-6, ITR-7: For firms, companies, trusts, and other entities, as detailed in the article.

Why These Changes Matter

The updated ITR forms reflect the CBDT’s commitment to simplifying tax compliance while aligning with the Finance (No. 2) Act, 2024. From easing filing for small taxpayers to refining capital gains and dividend reporting, these changes aim to make tax season smoother. However, the delayed form release might prompt calls for extended deadlines—stay tuned for updates. Get ready for a more streamlined tax filing experience in AY 2025–26!