Key difference between ITR2 and ITR3

Tax season can often be confusing, especially when it comes to figuring out about which income tax return (ITR) form one should fill out. Among the most common forms in India are ITR2 and ITR3. Let’s understand the key difference between the ITR2 and ITR3, so you can navigate your form filing with full confidence.

What is ITR2?

ITR-2 is a tax return form designated by the Income Tax Department for individuals and Hindu Undivided Families (HUFs) who derive income from sources other than business or professional profits and gains. This form is appropriate for taxpayers with more intricate income sources than those qualified for ITR-1, often referred to as Sahaj. Included in this category are capital gains, foreign income, and agricultural income greater than Rs. 5,000.

Who is Eligible to File ITR-2?

Individuals may file ITR-2 if they meet the following criteria:

1. Income from Salary or Pension: Those receiving a consistent income from salary or pension qualify to file ITR-2, as long as they do not have any business income.
2. Income from Multiple Properties: Taxpayers who receive rental income from more than one residential property are required to use ITR-2. Additionally, any arrears or unrealized rent associated with the property must be included in this form.
3. Income from Capital Gains: Individuals who realize short-term or long-term capital gains from the sale of assets, including shares, mutual funds, or real estate, must file ITR-2.
4. Income from Foreign Assets: ITR-2 is necessary for those who possess foreign assets, earn income from overseas, or need to disclose financial interests in foreign entities.
5. Income from Other Sources: Income derived from sources such as interest, dividends, lottery winnings, or horse racing must be reported using ITR-2.
6. Agricultural Income: If agricultural income surpasses ₹5000, it is required to be reported in ITR-2.
7. Non-Resident Individuals (NRIs): NRIs and Resident but Not Ordinarily Residents (RNORs) who earn income from any of the aforementioned sources are eligible to file ITR-2.

Who is Not Eligible to File ITR-2?

You are ineligible to file ITR-2 under the following circumstances:

1. Income from Business or Profession: If your earnings include profits and gains derived from any business or professional activities, you are required to file either ITR-3 or ITR-4, based on the specific nature and scale of your business operations.
2. Presumptive Income: Taxpayers who choose to utilize the presumptive taxation scheme as outlined in Sections 44AD, 44ADA, or 44AE are not permitted to file ITR-2.
3. Income Restricted to ITR-1: If your income is exclusively from salary, one house property, and other sources (excluding lottery winnings), and does not surpass ₹50 lakh, you should opt for ITR-1 rather than ITR-2.

What is the structure of ITR-2?

ITR-2 is categorized into the following sections:

• Part A: General Information
• Part B-TI: Calculation of Total Income
• Part B-TTI: Calculation of tax liability based on total income
• Schedule S: Information regarding income from salary
• Schedule HP: Information regarding income from house property
• Schedule CG: Calculation of income derived from capital gains
• Schedule 112A: Income from the sale of equity shares of a company
• Schedule 115AD: Income from the sale of equity shares of a company (applicable to non-residents)
• Schedule OS: Calculation of income from other sources
• Schedule CYLA: Information on income after offsetting current year losses
• Schedule BFLA: Information on income after offsetting brought forward losses from previous years
• Schedule CFL: Information on losses to be carried forward to subsequent years
• Schedule VIA: Deductions as per Chapter VI-A (Section)
• Schedule 80G: Information on donations eligible for deduction under section 80G
• Schedule 80GGA: Donations made for rural development and scientific research
• Schedule AMT: Calculation of Alternate Minimum Tax due under Section 115JC
• Schedule AMTC: Tax calculation under Section 115JD
• Schedule SPI: Income of specified individuals (such as spouse, minor child, etc.) that is included in the taxpayer's income (income of a minor child exceeding Rs. 1,500 per child must be included)
• Schedule SI: Income subject to taxation at special rates
• Schedule EI: Information on Exempt Income (income not included in Total Income)
• Schedule PTI: Income from business trusts or investment funds
• Schedule IT: Statement detailing advance tax payments and tax on self-assessment
• Schedule TDS1: Information on tax deducted at source from salary
• Schedule TDS2: Statement of tax deducted at source from income other than salary
• Schedule FSI: Information on income earned outside India and tax relief
• Schedule TR: Summary of tax relief claimed for taxes paid abroad
• Schedule FA: Information on foreign assets and income from any external source
• Schedule 5A: Details regarding the apportionment of income between different sources.

What documents are required to file ITR-2?

• If you receive a salary, you must obtain Form 16 from your employer.
• If you have earned interest from fixed deposits or a savings bank account with TDS deducted, you will need TDS certificates, specifically Form 16A, issued by the diductors.
• Form 26AS is necessary to verify TDS on both salary and other sources. This form can be downloaded from the e-filing portal.
• If you reside in a rented property, you should have rent payment receipts to calculate your HRA, unless you have already submitted these to your employer.
• For any capital gains transactions involving shares, a summary or profit/loss statement of these transactions for the year is required for capital gains computation.
• Your bank passbook and Fixed Deposit Receipts (FDRs) are needed to determine the amount of interest income.
• If you have received rental income from your property, you will need details regarding your tenant, local tax payments, and any interest on borrowed capital to calculate income from house property.
• Should you wish to claim any losses incurred during the current year, relevant documentation evidencing the loss will be necessary.
• To claim losses from the previous year, a copy of the ITR-V from that year, indicating the loss, is required.
• You will also need documents or proofs for claiming tax saving; deductions u/s 80C, 80D, 80G, and 80GG such as life and health insurance receipts, donation receipts, rent receipts, receipts for tuition fees etc., if the same were not considered in your Form 16.

What Is the ITR 3 Form?

The ITR 3 Form serves as a return form for individual taxpayers and members of Hindu Undivided Families to submit their income tax returns. To qualify for filing with this form, it is necessary to have a proprietorship or a business as one of your sources of income.

ITR 3 includes multiple sections for reporting various income sources, such as salary, capital gains, and income from house property. Tax returns can be submitted online using ITR Form 3 by accessing the official website of the Income Tax Department. It is essential to verify the information provided in this form, either physically or electronically, prior to final submission.

Who Is Eligible to File ITR 3 Form?

Having established a foundational understanding of ITR 3, it is essential to outline the eligibility criteria that must be met in order to file returns using this form:

1. Individuals whose income is derived from a proprietary business.
2. Professionals whose income is generated through their practice.
3. Income received in the form of interest, salary, bonuses, commissions, or remuneration from a partnership firm.
4. Individuals earning income from house property, pension, or salary, which is categorized as income from other sources, are also eligible to file returns using ITR 3.
5. Non-Resident Individuals.
6. Individuals possessing income-generating assets located outside of India.

In summary, any individual whose income falls under the category of "profits or gains from profession or business" and who does not qualify to file ITR-1, ITR-2, or ITR-4 must utilize Form ITR-3 for their tax returns.

Who Is Not Eligible to File ITR 3 Form?

Form ITR – 3 is exclusively available for use by individuals or Hindu Undivided Families (HUFs). Additionally, individuals, HUFs, or partners who do not derive income from business, profession, or partnership are ineligible to utilize ITR – 3.

What is the Structure of an ITR-3 

Part A of ITR 3

Here are the components of Part A of the ITR 3 Form:

• Part A-GEN: Contains general information and the nature of the business.
• Part A Manufacturing Account: Includes details of the manufacturing account for the entire financial year.
• Part A Trading Account: Provides trading account information for a single financial year.
• Part A P&L: Details the profit and loss account for one financial year.
• Part A BS: Represents the year-end balance sheet for the proprietary business.
• Part A OI: Contains optional information relevant for audits under section 44AB.
• Part A QD: Includes optional quantitative details for audits under section 44AB.

Schedules of ITR 3

• The following are some key schedules of ITR 3:
• Schedule S: Used for calculating income derived from salaries.
• Schedule BP: Details the income of taxpayers from business or professional activities.
• Schedule DPM: Provides information on depreciation for plants and machinery.
• Schedule DCG: Summarizes short-term capital gains from the sale of depreciable assets.
• Schedule HP: Summarizes income from house properties.
• Schedule DOA: Summarizes depreciation on other assets as per the Income Tax Act.
• Schedule 112 A: Taxpayers are required to report capital gains under Section 112A.
• Schedule ESR: Computes deductions under Section 35.
• Schedule BFLA: Presents income after offsetting unabsorbed losses from the previous financial year.
• Schedule 10AA: Calculates deductions under Section 10AA.
• Schedule VI A: Encompasses all applicable deductions from Section 80C to Section 80U from an individual's total income under Chapter VIA.
• Schedule AMTC: Computes the tax credit for an assessee under Section 115JD.
• Schedule CFL: Contains statements of losses that will be carried forward to the next financial year.
• Schedule UD: Pertains to unabsorbed depreciation.
• Schedule 80IB: Includes deductions under Section 80IB.
• Schedule 80G: Provides information regarding donations under Section 80G.
• Schedule EI: Contains a statement of income that is excluded from an assessee's total income.
• Schedule GST: Contains information on turnover. Schedule VDA: Holds details of income from Virtual Digital Assets

Part B of ITR 3

Components under Part B of ITR Form 3 are mentioned in the list below. 

• Part B-TI: Includes calculation of taxpayer’s total income
• Part B-TI: This section includes tax liability on an individual’s total income

Here's a concise table comparing ITR 2 and ITR 3 for taxpayers in India:

Frequently Asked Questions (FAQ)