The New ITR-2: Enhancements, Reporting Changes, and the High Stakes of Choosing the Right Form (AY 2025-26)

Major Overhaul for ITR-2 Utility (AY 2025-26): What Taxpayers Need to Know and Why Choosing the Right Form is Crucial

The Income Tax Department has launched an updated ITR-2 Excel Utility for Assessment Year (AY) 2025-26, featuring six significant enhancements designed to simplify filing and improve compliance.¹ However, tax professionals are issuing a strong warning: selecting the incorrect ITR form can lead to notices, penalties, or even rejection of your return.²

Key Enhancements to the ITR-2 Utility:

The revamped ITR-2 Excel Utility boasts several improvements aimed at a more streamlined and accurate tax filing experience:³

1. Redesigned User Interface: A more intuitive and user-friendly layout aims to simplify the process, reducing potential errors during form completion.
2. Advanced Validation Rules: New rules automatically flag inconsistencies, ensuring greater data accuracy, particularly beneficial for less experienced filers.
3. New Fields for Compliance: The utility now includes additional fields to align with recent tax law amendments, ensuring comprehensive and compliant disclosures.⁴
4. Enhanced Data Security: Robust encryption protocols have been integrated to reinforce data security and user privacy.
5. Expanded Reporting Requirements: More detailed disclosures are now required in specific areas, bringing India’s tax reporting standards closer to global best practices.⁵ Notable additions include:
   • Capital Loss on Share Buybacks: A new row to report capital losses from share buybacks, provided corresponding dividend income is disclosed.
   • Dividend Income Under Section 2(22)(f): A separate field for specific disclosure of dividend income from share buybacks.
   • Real Estate Cost Split: Requirement to split acquisition and improvement costs for real estate transfers before and after July 23, 2024, for correct indexation application.⁶
   • Increased Asset-Liability Reporting Threshold: The threshold for reporting movable and immovable assets and liabilities in Schedule AL has been doubled from ₹50 lakh to ₹1 crore of total income.⁷
   • Capital Gains Split: Separate columns to differentiate capital gains realized before and on or after July 23, 2024, due to changes in tax rates from the Finance Act, 2024.⁸
   • TDS Section Code: A new field in the TDS schedule to specify the section code for improved tax credit matching.⁹
6. Refined Computation Logic and Broader Compatibility: Improved precision in tax calculations ensures accurate liability reflection. The utility also offers broader compatibility across various devices and operating systems, along with an enhanced help section for step-by-step guidance.

The Peril of Picking the Wrong ITR Form:

While the ITR-2 utility offers significant upgrades, experts like CA Chirag Chauhan strongly caution taxpayers against misselecting their ITR form. With utilities for ITR-1, ITR-2, and ITR-3 now available, understanding your eligibility is paramount.

Individuals MUST NOT use ITR-1 (Sahaj) if any of the following apply:

• You are a Non-Resident Indian (NRI).
• Your total income exceeds ₹50 lakh.
• You have taxable capital gains, especially if long-term capital gains under Section 112A exceed ₹1.25 lakh.
• You have income from more than one house property.
• Your agricultural income exceeds ₹5,000.
• You have income from lottery winnings, racehorses, or other specific sources.
• You have investments in unlisted equity shares at any point during the financial year.¹⁰
• You are a Director in a company.
• You have income from Business or Profession.
• You have TDS deducted under Section 194N.
• You have deferred ESOP tax from a startup.
• You have any asset (including financial interest in any entity) located outside India.
• You have signing authority in any account located outside India.
• You have any brought forward loss or loss to be carried forward under any head of income.

Consequences of Filing an Incorrect Form:

Using an ITR form for which you are ineligible can lead to severe repercussions, including:

• Defective Return Notice (Section 139(9)): The Income Tax Department may issue a notice, requiring you to rectify the error within 15 days.¹¹
• Return Invalidation/Rejection: Failure to respond or correct the return within the stipulated time can result in your original return being treated as if it was never filed.¹²
• Penalties: This can attract penalties under Section 234F (up to ₹5,000, or ₹1,000 if income is below ₹5 lakh) and interest under Section 234A.
• Loss of Benefits: You may lose the ability to claim certain deductions, exemptions, or carry forward losses.¹³
• Delayed Refunds: Processing of defective returns can significantly delay any tax refunds due.¹⁴
• Under-reporting/Misreporting Penalties: If the wrong form leads to non-reporting or under-reporting of income, penalties of 50% (under-reported) or 200% (misreported) of the tax payable on such income can be levied under Section 270A.¹⁵

In this season of heightened technological advancements and increased scrutiny, taxpayers must prioritize accuracy and awareness. Thoroughly understanding your income profile and selecting the correct ITR form are critical steps for a smooth and compliant tax filing experience.