New CBDT Guidelines for ITR-1 and ITR-4 Filing: Notification No. 40/2025 Simplifies Tax Filing for Small Investors
The Central Board of Direct Taxes (CBDT) has officially issued Notification No. 40/2025 dated April 29, 2025, introducing significant changes to the Income Tax Return filing process for Assessment Year 2025-26. This landmark notification brings relief to millions of small investors by allowing them to file simpler ITR forms even if they have capital gains up to a certain limit. The notification, which introduces the Income-tax (Twelfth Amendment) Rules, 2025, has come into effect from April 1, 2025, and applies to income earned between April 1, 2024, and March 31, 2025.
Also Read-TDS And TCS Rate Chart FY 2025-26 AY 2026-27
The most notable change in this notification is the inclusion of long-term capital gains (LTCG) under Section 112A up to Rs. 1.25 lakh in both ITR-1 (Sahaj) and ITR-4 (Sugam) forms. Previously, taxpayers with any capital gains, regardless of the amount, were required to file the more complex ITR-2 form. This change is expected to significantly ease the compliance burden for small investors and salaried individuals who make modest investments in the stock market or equity mutual funds.
Professional Impact of New ITR Guidelines on Tax Practitioners
| Stakeholder | Impact of New Guidelines | Opportunities | Challenges |
|---|---|---|---|
| Chartered Accountants | Simplified filing for clients with small capital gains | Can service more clients efficiently | Need to update knowledge on new form structures |
| Tax Consultants | Reduced complexity for basic capital gains cases | Can focus on more complex tax planning | Potential reduction in fees for basic return filing |
| Individual Taxpayers | Can use simpler forms despite having capital gains | Reduced compliance cost and time | Need to understand the Rs. 1.25 lakh limit properly |
| Small Investors | No need to file complex ITR-2 for exempt capital gains | Encourages participation in equity markets | Must track capital gains accurately |
| Software Providers | Need to update tax filing software | New features to highlight simplified compliance | Quick turnaround time for updates before filing season |
Understanding the Scope of CBDT Notification No. 40/2025.
The notification introduces several amendments to the Income-tax Rules, 1962, with the primary objective of simplifying tax filing for individual taxpayers. Beyond just substituting the years “2024” with “2025” and “2023” with “2024” in Rule 12, the notification makes substantive changes to the eligibility criteria for ITR-1 and ITR-4.
In particular, a new sub-clause (iv) has been inserted in clause (a) of sub-rule (1) of Rule 12. This amendment specifically addresses taxpayers who have only long-term capital gains under Section 112A not exceeding Rs. 1.25 lakh and do not have any brought forward or carry forward losses under the capital gains head. This means that millions of small investors who previously had to navigate the complexities of ITR-2 can now use the much simpler ITR-1 or ITR-4 forms.
The amendment to Rule 12(ca) extends similar benefits to taxpayers who compute their income under the presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE. These taxpayers can now file Form SUGAM (ITR-4) even if they have long-term capital gains under Section 112A up to Rs. 1.25 lakh, provided they have no brought forward or carry forward losses.
Who Can Now File ITR-1 (Sahaj) for AY 2025-26?
The eligibility criteria for ITR-1 have been expanded to include more taxpayers. According to the notification, ITR-1 can now be filed by:
- Individuals who are residents (other than not ordinarily resident)
- Having total income up to Rs. 50 lakh
- Having income from salaries, one house property, other sources (interest, etc.)
- Having long-term capital gains under Section 112A up to Rs. 1.25 lakh
- Having agricultural income up to Rs. 5,000
It’s important to note that ITR-1 is still not applicable for an individual who:
- Is a director in a company
- Has invested in unlisted equity shares
- Has TDS deducted under Section 194N
- Has income tax deferred on ESOP
- Has assets (including financial interest in any entity) located outside India
Who Can Now File ITR-4 (Sugam) for AY 2025-26?
Similar to ITR-1, the eligibility criteria for ITR-4 have also been expanded. According to the notification, ITR-4 can now be filed by:
- Individuals, HUFs, and firms (other than LLPs) being residents
- Having total income up to Rs. 50 lakh
- Having income from business and profession computed under Sections 44AD, 44ADA, or 44AE
- Having long-term capital gains under Section 112A up to Rs. 1.25 lakh
The ITR-4 form is particularly beneficial for small business owners who do not maintain books of accounts but only maintain sales ledgers in approximate volume. This includes online sellers, traders, wholesalers, and manufacturers. It’s also suitable for freelancers such as online content writers, bloggers, vloggers, and professionals like chartered accountants, doctors, lawyers, and engineers whose income is computed on a presumptive basis.
The Strategic Impact of Simplifying ITR Filing for Capital Gains.
The inclusion of long-term capital gains in simpler ITR forms represents a significant shift in India’s approach to tax compliance. This move reflects a clear shift towards enhancing taxpayer services by allowing individual taxpayers to file simplified tax return where they have long-term capital gains up to Rs. 1.25 lakh. Thereby, it removes the burden of navigating more complex forms. The change is expected to encourage greater voluntary compliance, reduce filing-related stress, and make the system more inclusive and user-friendly for small taxpayers.
This change addresses a long-standing inconvenience for salaried individuals who had modest investments in equity markets. Previously, even if their capital gains were exempt by virtue of the threshold limit of Rs. 1.25 lakh under Section 112A, they were required to file the more complex ITR-2 form. This involved elaborate disclosure requirements, including detailed information about the capital gains, specifications of securities, and other complexities that often necessitated professional help.
The new Form ITR-1 for FY 2024-25 (AY 2025-26) now incorporates a small section specifically for reporting income in the nature of long-term capital gains on which tax is not payable due to the exemption provided in Section 112A. This simplification is expected to benefit millions of taxpayers who make modest investments in the stock market or mutual funds.
Recent Statistics on Tax Filing in India.
The impact of these changes must be viewed in the context of India’s growing tax base. According to data shared on the income tax portal, more than 9.19 crore people filed their tax returns for FY25 by the end of March 2025, setting a new record. The number of e-verified returns stood at 8.64 crore during this time, with Rs. 4,35,008 crore issued in refunds.
The data also shows interesting patterns in income distribution:
- Around 4.19 crore people reported income less than Rs. 5 lakh
- 3.4 crore taxpayers reported earnings between Rs. 5 lakh to Rs. 10 lakh
- 1.34 crore people declared income between Rs. 10 lakh and Rs. 50 lakh
- 3.24 lakh individuals reported income over Rs. 1 crore
The tax base has grown exponentially over the past few years, rising from 7.78 crore returns in FY2023 to 8.52 crore returns in FY2024. With the simplification brought about by the new notification, these numbers are expected to grow further as compliance becomes easier.
Understanding Section 112A and the Rs. 1.25 Lakh Exemption.
To fully appreciate the significance of the changes introduced by Notification No. 40/2025, it’s important to understand Section 112A of the Income Tax Act and how the Rs. 1.25 lakh exemption works.
Section 112A provides for taxation of long-term capital gains arising from the sale or transfer of equity shares in a company or units of an equity-oriented fund or units of a business trust where securities transaction tax has been paid on acquisition or transfer or both. Under this section, long-term capital gains up to Rs. 1.25 lakh in a financial year are exempt from tax.
Example: If an individual earns Rs. 1 lakh as long-term capital gains from selling listed equity shares or equity mutual funds, no tax would be payable on this amount. However, if the gains exceed Rs. 1.25 lakh, say Rs. 2 lakh, then tax would be payable at 10% (plus applicable surcharge and cess) on Rs. 75,000 (Rs. 2 lakh – Rs. 1.25 lakh).
Prior to the new notification, even if an individual had exempt capital gains (i.e., within the Rs. 1.25 lakh limit), they still had to file the more complex ITR-2 form. Now, with the changes introduced by Notification No. 40/2025, such individuals can use the simpler ITR-1 or ITR-4 forms, significantly reducing their compliance burden.
Practical Implications for Different Categories of Taxpayers.
For Salaried Individuals with Small Investments.
Consider Rajesh, a salaried professional earning Rs. 12 lakh per annum who has invested in equity mutual funds. In FY 2024-25, he sold some units and earned a long-term capital gain of Rs. 1 lakh. Under the previous rules, despite the capital gains being exempt from tax (as they are below Rs. 1.25 lakh), Rajesh would have had to file ITR-2, which is more complex and requires detailed disclosures.
With the new notification, Rajesh can now file the simpler ITR-1 form, saving time and potentially the cost of hiring a tax professional. This is a significant relief, especially considering that Rajesh’s capital gains are not even taxable.
For Small Business Owners Under Presumptive Taxation.
Consider Priya, who runs a small online business and computes her income under Section 44AD (presumptive taxation). Her business income for FY 2024-25 is Rs. 30 lakh. Additionally, she made some investments in equity shares and earned a long-term capital gain of Rs. 1.2 lakh in the same financial year.
Under the previous rules, Priya would have had to file ITR-3, which is complex and designed for businesses with detailed books of accounts. With the new notification, she can now file the simpler ITR-4 form, as her long-term capital gains are within the Rs. 1.25 lakh limit and she computes her business income under the presumptive taxation scheme.
Expert Opinions on the New CBDT Guidelines
Tax experts have largely welcomed the changes introduced by Notification No. 40/2025. This change streamlines the tax filing process, making it more accessible and less burdensome for small investors and salaried individuals, thereby encouraging timely and accurate compliance.
The consensus among tax experts is that the notification represents a positive step towards simplifying tax compliance, particularly for small taxpayers with modest investments in equity markets.
Preparing for Tax Filing: Key Dates and Documents.
With the notification of ITR-1 and ITR-4 forms for AY 2025-26, taxpayers can start preparing for the upcoming tax filing season. Here are some key points to keep in mind:
- Filing Deadline: For individuals and those not requiring account audits, the submission deadline remains July 31, 2025.
- Required Documents:
- Form 16 (if you’re a salaried employee)
- Bank statements showing interest income
- Details of house property income (if applicable)
- Capital gains statements from brokers (for equity investments)
- Documentary evidence of any deductions claimed
- New Requirements: The new forms include modifications regarding deductions under sections 80C, 80GG, and others, featuring a drop-down menu in the utility. Additionally, taxpayers must provide detailed section-wise information for TDS deductions.
- E-Filing: Tax filing can commence once the I-T department releases the utility for the 2024-25 fiscal year, which is expected soon.
Comparison Between Old and New Guidelines.
| Aspect | Old Guidelines (AY 2024-25) | New Guidelines (AY 2025-26) |
|---|---|---|
| LTCG in ITR-1 | Not permitted. Any capital gains required filing ITR-2 | Permitted if LTCG under Section 112A is up to Rs. 1.25 lakh with no brought forward/carry forward losses |
| LTCG in ITR-4 | Not permitted. Required filing ITR-3 | Permitted if LTCG under Section 112A is up to Rs. 1.25 lakh with no brought forward/carry forward losses |
| Disclosure Requirements | Elaborate disclosure of capital gains details in ITR-2/3 | Simplified reporting of exempt LTCG in ITR-1/4 |
| Impact on Taxpayers | Higher compliance burden even for exempt capital gains | Reduced compliance burden for small investors |
| Professional Assistance | Often required for filing ITR-2/3 | May not be required for simple cases with ITR-1/4 |
| Form Structure | No provision for capital gains in ITR-1/4 | Dedicated section for reporting exempt LTCG in ITR-1/4 |
Frequently Asked Questions (FAQs).
- Who is eligible to file ITR-1 for AY 2025-26?
Resident individuals (other than not ordinarily resident) with total income up to Rs. 50 lakh, having income from salaries, one house property, other sources (interest, etc.), long-term capital gains under Section 112A up to Rs. 1.25 lakh, and agricultural income up to Rs. 5,000 can file ITR-1. - Can I file ITR-1 if I am a director in a company?
No, ITR-1 cannot be used by individuals who are directors in a company, even if they meet all other eligibility criteria. - What is the maximum amount of long-term capital gains allowed for filing ITR-1?
Long-term capital gains under Section 112A up to Rs. 1.25 lakh are allowed for filing ITR-1, provided there are no brought forward or carry forward losses. - Who can file ITR-4 for AY 2025-26?
Resident individuals, HUFs, and firms (other than LLPs) with total income up to Rs. 50 lakh, having income from business and profession computed under Sections 44AD, 44ADA, or 44AE, and having long-term capital gains under Section 112A up to Rs. 1.25 lakh can file ITR-4. - What is Section 112A of the Income Tax Act?
Section 112A provides for taxation of long-term capital gains arising from the sale/transfer of equity shares in a company or units of an equity-oriented fund or units of a business trust where securities transaction tax has been paid on acquisition or transfer or both. LTCG up to Rs. 1.25 lakh in a financial year is exempt from tax under this section. - What happens if my long-term capital gains exceed Rs. 1.25 lakh?
If your long-term capital gains under Section 112A exceed Rs. 1.25 lakh, you cannot use ITR-1 or ITR-4. You would need to file ITR-2 or ITR-3, as applicable. - What is the deadline for filing ITR for AY 2025-26?
For individuals and those not requiring account audits, the submission deadline for ITR filing remains July 31, 2025. - Can I file ITR-1 if I have short-term capital gains?
No, ITR-1 can only be used if you have long-term capital gains under Section 112A up to Rs. 1.25 lakh. If you have short-term capital gains, you would need to file ITR-2 or ITR-3, as applicable. - How will the new notification affect tax filing for small investors?
The new notification will significantly simplify tax filing for small investors by allowing them to use the simpler ITR-1 or ITR-4 forms, even if they have long-term capital gains up to Rs. 1.25 lakh. This reduces the compliance burden and potentially eliminates the need for professional assistance for basic tax filing. - Where can I access the updated ITR forms?
The updated ITR forms can be accessed on the Income Tax e-Filing portal once the I-T department releases the utility for the 2024-25 fiscal year.
Conclusion: A Step Towards Simplified Tax Compliance.
The notification of ITR-1 and ITR-4 forms for AY 2025-26 with provisions for including long-term capital gains represents a significant step towards simplifying tax compliance in India. By allowing small investors to use simpler tax forms, the government has addressed a long-standing inconvenience and potentially reduced compliance costs for millions of taxpayers.
This move aligns with the government’s broader objective of enhancing taxpayer services and encouraging voluntary compliance. As the tax filing season for AY 2025-26 approaches, taxpayers should familiarize themselves with the changes introduced by Notification No. 40/2025 and determine which ITR form is appropriate for their specific circumstances. With the right preparation and understanding of the new guidelines, filing income tax returns for FY 2024-25 should be a simpler and more straightforward process for many taxpayers.
For those with complex tax situations or uncertainties about which form to use, consulting with a tax professional remains advisable. However, for millions of small investors and salary earners with modest capital gains, the path to tax compliance has just become a little smoother.
Disclaimer: This article is for informational purposes only. The content provided is based on the latest available information and is not intended as legal, financial, or tax advice. Readers are advised to consult with a qualified tax professional or the official government sources for advice specific to their individual circumstances. The author and publisher are not responsible for any errors or omissions or for any actions taken based on the information provided in this article.
Discover more from TaxGst.in
Subscribe to get the latest posts sent to your email.
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.
