Which ITR Form to Use for Salaried Employee: ITR-1 vs ITR-2

The annual income tax filing season is a critical time for every salaried individual in India. For the Assessment Year (AY) 2025-26, the Central Board of Direct Taxes (CBDT) has introduced a series of significant changes to the Income Tax Return (ITR) forms. These updates bring both simplifications and new disclosure requirements that every taxpayer must understand.

Choosing the correct ITR form—the very first step in your tax filing journey—is more crucial than ever. For most salaried professionals, this decision boils down to a choice between ITR-1 (Sahaj) and the more detailed ITR-2. The new rules for AY 2025-26 have fundamentally altered the eligibility criteria for these forms, particularly concerning small capital gains and reporting requirements for high-income earners.

Also Read-How to File ITR-1 Sahaj Online: A Complete Guide for Salaried Employees (FY 2024–25)

This comprehensive guide is fully updated for the new ITR forms applicable for the FY 2024-25 (AY 2025-26). We will explore the pivotal changes, break down the new eligibility rules for ITR-1 and ITR-2, and provide a clear, step-by-step framework to help you confidently select the right form, ensuring your return is accurate, compliant, and filed smoothly before the deadline.

What’s New? Key Changes in ITR Forms for Salaried Employees (AY 2025-26).

Before diving into the specifics of each form, it’s essential to understand the landmark changes introduced this year. These updates directly impact which ITR form a salaried employee will use.

Big Relief for Small Investors: Limited Capital Gains Now Allowed in ITR-1.

This is arguably the most significant change for AY 2025-26. Previously, any income from capital gains, no matter how small, automatically disqualified a taxpayer from using the simple ITR-1 form.

The New Rule: For AY 2025-26, a resident individual can now file ITR-1 even if they have Long-Term Capital Gains (LTCG) from the sale of listed equity shares or equity-oriented mutual funds (under Section 112A), provided the total gain is up to ₹1.25 lakh. This change provides major relief to salaried individuals who make small investments and no longer need to navigate the complexities of ITR-2 for minor gains.

Simplified Reporting for High Earners: Schedule AL Threshold Raised.

Another major simplification affects high-income taxpayers. The requirement to provide a detailed declaration of assets and liabilities in Schedule AL has been relaxed.

The New Rule: The threshold for mandatory filing of Schedule AL (Assets and Liabilities) in ITR-2 and ITR-3 has been increased from a total income of ₹50 lakh to ₹1 crore. This means a salaried person earning, for instance, ₹80 lakh a year—who must file ITR-2—is no longer burdened with the detailed reporting of all their assets and liabilities, simplifying their filing process considerably.

Mandatory Disclosures for Deductions.

While the government has simplified some aspects, it has increased the demand for transparency in others. The new ITR forms mandate more granular details for claiming common deductions under the Old Tax Regime. You can no longer just state the total amount; you must now provide specific proofs and details within the form itself. This includes enhanced reporting for HRA, home loan interest, and deductions under Chapter VI-A like Section 80C and 80D.

Important Filing Deadline Extension.

In view of the significant changes and the time needed to update the filing utilities, the CBDT has extended the due date for filing ITR for individuals and HUFs (whose accounts are not required to be audited).

New Deadline: The last date for filing your income tax return for AY 2025-26 is September 15, 2025.

ITR-1 (Sahaj) for AY 2025-26.

ITR-1, or ‘Sahaj’, remains the simplest form, but its scope has been thoughtfully expanded this year to include more taxpayers.

Who is Eligible to File ITR-1? The Definitive Checklist for AY 2025-26.

To use the ITR-1 form, you must meet all of the following updated conditions:

• Residential Status: You must be a Resident individual.
• Total Income Limit: Your total income from all sources must be ₹50 lakh or less.
• Sources of Income: Your income must come from the following permitted sources:
  • Income from Salary/Pension.
  • Income from One House Property (excluding cases with brought-forward loss).
  • Income from Other Sources (e.g., savings account interest, FD interest, family pension). This still excludes winnings from lottery or horse races.
  • Agricultural Income up to ₹5,000.
  • [New for AY 2025-26] Long-Term Capital Gains under Section 112A (from listed equity shares/units of an equity-oriented fund) up to a total of ₹1.25 lakh.

Who CANNOT File ITR-1? Updated Exclusions.

You are not eligible for ITR-1 if any of the following apply to you:

• Your total income exceeds ₹50 lakh.
• You have income from more than one house property.
• You have any capital gains other than LTCG under Sec 112A, or your LTCG under Sec 112A exceeds ₹1.25 lakh. This means if you have any Short-Term Capital Gains or any Long-Term Capital Gains from debt funds, property, gold, etc., you cannot use ITR-1.
• You are a Director in any company.
• You have held any unlisted equity shares.
• You have any foreign income or foreign assets.
• You are a Non-Resident (NRI) or Resident Not Ordinarily Resident (RNOR).
• Your agricultural income is more than ₹5,000.
• You have income from Business or Profession.

A Practical Scenario (Post-Changes): When ITR-1 is the Perfect Fit.

Let’s consider Priya, a 32-year-old IT consultant.

• Salary: Her annual salary is ₹20 lakh.
• Investments: She sold some equity mutual fund units she held for three years, realizing a Long-Term Capital Gain (under Sec 112A) of ₹60,000.
• Other Income: She earned ₹25,000 in FD interest.
• Total Income: Her total income is ₹20,85,000 (well under the ₹50 lakh limit).

Conclusion for AY 2025-26: In previous years, Priya would have been forced to file the complex ITR-2 because of her capital gains. However, under the new rules, since her gain is LTCG u/s 112A and is less than ₹1.25 lakh, she is now eligible to file the much simpler ITR-1 form. This is a perfect example of the new simplification.

When to Use the Comprehensive Form: ITR-2 for AY 2025-26.

ITR-2 is the form for individuals and Hindu Undivided Families (HUFs) who have sources of income that fall outside the narrow scope of ITR-1, but who do not earn from a business or profession.

Who Should File ITR-2? Key Indicators for AY 2025-26.

You must file ITR-2 if you are a salaried individual and one or more of the following conditions apply:

• Your total income is more than ₹50 lakh.
• You have income from more than one House Property.
• You have income from Capital Gains that does not fit the new ITR-1 criteria (i.e., any short-term gains, or LTCG from sources other than equity, or if LTCG from equity exceeds ₹1.25 lakh).
• You are a Director in a company.
• You hold unlisted equity shares.
• You have any foreign income or foreign assets to report.
• You are a Non-Resident (NRI) or Resident Not Ordinarily Resident (RNOR).
• Your agricultural income is more than ₹5,000.
• You have income from lottery, horse races, or other speculative activities.
• You need to carry forward losses from house property or capital gains.

A Major Change in ITR-2 Reporting.

• Asset & Liability Reporting (Schedule AL): As mentioned, this detailed schedule is now mandatory only if your total income exceeds ₹1 crore. If your income is, say, ₹90 lakh, you will file ITR-2 but are exempt from filling Schedule AL.
• Segregated Capital Gains Reporting: ITR-2 now requires you to report capital gains transactions separately for those that occurred before or on/after July 23, 2024, to comply with new taxation rules.

When Do You Still Need ITR-2?

• Scenario 1: The High Earner (Aarav)
  • Profile: Aarav is a Vice President with a salary of ₹95 lakh. He has no other income.
  • Conclusion: His income exceeds the ₹50 lakh threshold, so he must file ITR-2. However, thanks to the new rules, since his income is below ₹1 crore, he does not need to fill the lengthy Schedule AL.
• Scenario 2: The Diversified Investor (Rohan)
  • Profile: Rohan has a salary of ₹30 lakh. This year, he sold some shares for a Long-Term Gain of ₹50,000 and also sold a debt mutual fund for a Short-Term Gain of ₹20,000.
  • Conclusion: Although his LTCG from shares is below the new ITR-1 limit, the presence of Short-Term Capital Gains immediately disqualifies him from ITR-1. He must file ITR-2.

ITR-1 vs. ITR-2: Updated Head-to-Head Comparison (AY 2025-26).

Here is a revised comparison table reflecting all the new rules for AY 2025-26.

New Disclosure Requirements for Deductions (Old Regime).

For AY 2025-26, if you opt for the Old Tax Regime to claim deductions, you must provide more detailed information within the ITR form itself. Be prepared with the following:

Claiming HRA Exemption (Section 10(13A)).

You now need to provide specific details related to your House Rent Allowance claim, ensuring transparency and accurate calculation.

Disclosing Home Loan Interest (Section 24(b) & 80EE/80EEA).

To claim deductions for interest paid on your home loan, you must furnish:

• Lender’s Name
• Lender’s PAN (if available)
• Loan Account Number
• Date of Loan Sanction
• Total Loan Amount

Reporting Your Section 80C Investments.

For deductions under Section 80C, be ready to provide specific identifiers:

• Life Insurance: Policy Number
• Public Provident Fund (PPF): PPF Account Number
• ELSS Mutual Funds: Folio Number
• Tuition Fees: Receipt Number and institution details

Similar detailed reporting is now required for deductions under Section 80D (Health Insurance), Section 80E (Education Loan), and others. The goal is to auto-validate claims and reduce manual checks.

Updated Step-by-Step Guide: How to Decide Your ITR Form for AY 2025-26.

Follow this updated decision flowchart:

Step 1: Check Your Residential Status & Total Income.

• Are you a Non-Resident or RNOR? If Yes, use ITR-2.
• Is your total gross income more than ₹50 lakh? If Yes, use ITR-2.
• If No to both, proceed to Step 2.

Step 2: Analyze Your Capital Gains.

• Do you have any capital gains?
  • If No, proceed to Step 3.
  • If Yes, ask the next question: Is the gain exclusively Long-Term Capital Gain under Sec 112A (from listed equity/MFs) AND is the total gain amount ₹1.25 lakh or less?
    • If Yes to this specific condition, you can still consider ITR-1. Proceed to Step 3.
    • If No (you have STCG, other LTCG, or the gain exceeds ₹1.25 lakh), you must use ITR-2.

Step 3: Check Other Income Sources & Conditions.

• Do you have income from more than one house property?
• Do you have foreign assets or foreign income?
• Are you a Director in a company?
• Do you hold unlisted equity shares?
• Is your agricultural income > ₹5,000?
• If you answered Yes to any of these, you must use ITR-2.

Step 4: Make Your Final Decision.

• If you have passed through all the checks above without being directed to ITR-2, then ITR-1 (Sahaj) is the correct form for you for AY 2025-26.

Frequently Asked Questions (FAQs) for AY 2025-26.

I have a salary of ₹15 lakh and sold some shares with a long-term gain of ₹70,000. Which form do I use for AY 2025-26?

For AY 2025-26, you can now use ITR-1. Since your gain is LTCG under Sec 112A and is below the new ₹1.25 lakh threshold, you are no longer required to file ITR-2 for this reason alone.

My salary is ₹90 lakh. Do I need to declare all my assets in the ITR form?

No. While you must file ITR-2 because your income exceeds ₹50 lakh, you are exempt from filling Schedule AL. For AY 2025-26, the mandatory disclosure of assets and liabilities is only required if your total income exceeds ₹1 crore.

I have a salary of ₹40 lakh and Short-Term Capital Gains of ₹10,000. Can I use ITR-1?

No. The new rule in ITR-1 is only for a specific type of Long-Term Capital Gain. The presence of any Short-Term Capital Gain makes it mandatory for you to file ITR-2.

What is the last date to file my ITR for FY 2024-25?

The due date for individuals whose accounts are not required to be audited for AY 2025-26 has been extended to September 15, 2025.

Conclusion: Tax Season AY 2025-26 with Clarity.

The ITR forms for Assessment Year 2025-26 represent a significant shift. The government has made a clear effort to simplify compliance for millions of small investors by allowing limited capital gains in ITR-1 and for many high-income earners by raising the asset reporting threshold.

However, this simplification comes with a clear trade-off: a demand for greater transparency through enhanced disclosure requirements for deductions. Your key takeaways should be:

• Check your capital gains carefully. If they are minor and fit the new ITR-1 criteria, you can save significant time and effort.
• Understand the ₹1 crore threshold for asset reporting. Don’t assume you need to fill Schedule AL in ITR-2 just because your income is over ₹50 lakh.
• Be diligent with documentation. Before you file, gather all your policy numbers, loan account details, and other specific information required for claiming deductions.

By understanding these new rules, you can confidently choose the right ITR form—be it the newly empowered ITR-1 or the more streamlined ITR-2—and ensure you are fully compliant with the latest regulations for a hassle-free tax season.

Disclaimer:

The information provided in this article is for general informational and educational purposes only. It is based on Indian tax laws and regulations as of July 2025 and is subject to change. This content is not intended to be a substitute for professional tax, legal, or financial advice from a qualified professional. We make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. You should not act or refrain from acting on the basis of any information contained herein without seeking the advice of a certified tax advisor.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.