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Check out when ‘not’ to file ITR-1 to prevent yourself from faulty Income Tax filing

Talking about income tax, while filing a return we have come to an opinionated fact that ITR-1 form is a common form filed by at least 45% of taxpayers. Over the past 3 years the data suggests ITR-1 to be the most common e-filed form. If an assessee files a return using the incorrect form, the file will be regarded as faulty and the income tax department may issue a notice.

Well, for the ones who are not aware of the availability in ITR-1 form – It is available for resident individual having
a total income upto ₹50 lakhs from the following sources:

i) Salaries
ii) One house property
iii) Other resources such as interest, etc
iv) Agricultural income of upto ₹5000

Even if they meet the aforementioned requirements, a resident individual taxpayer in some circumstances is not permitted to file their tax returns using ITR-1.

The key component of an employment contract that unambiguously defines an employer-employee relationship is what makes an income qualify as “income from salary.” This is distinct from retainership fees paid for consulting services, such as those paid to a business director. Residents are not permitted to file their income tax returns in ITR-1 under such circumstances.

Another circumstance is that many residents now have the opportunity to work directly with foreign companies from India thanks to the convenience of working from home. Such taxpayers must file their income tax returns in ITR-2 or ITR-3 rather than ITR-1 if they earn any income from sources outside of India.

Owning stock in overseas corporations can be quite profitable. However, in certain situations, residents must disclose specifics about their assets that are located outside of India, and they cannot do so in the ITR-1. Any bank account held outside of India has the same restrictions. ITR-2 or ITR-3 forms must be used to make such disclosures.

Another issue is when you are holding an unlisted equity share. This is primarily seen in startups where employees are given stock options. Due to the fact that these shares are not listed, the department offers a separate area for reporting information on unlisted shares that is not included in ITR-1. Such resident individuals are required to file their income tax return in ITR-2 or ITR-3 since these are a component of an individual’s personal investment and disclosing them aids in greater tax monitoring and transparency.