Clipped from: https://www.taxbuddy.com/blog/itr-3-vs-itr-2-for-income-from-business-capital-gains-and-more
Bhavika Rajput- Jun 19
- 17 min read
Filing the right Income Tax Return (ITR) form is more than just a checkbox on your financial to-do list, it determines whether your return is valid and how effectively your income sources are reported. ITR 2 and ITR 3 cater to distinct taxpayer profiles. If business or professional income, share trading, or partnership firm earnings are part of your financial landscape, ITR 3 is the form to choose. For salaried individuals or those with capital gains but no business activity, ITR 2 usually applies. The distinction has legal and financial implications, especially when you’re navigating the rules for FY 2024–25 (AY 2025–26).
| Presumptive Taxation (44AD/ADA/AE) | ITR 2–Not applicable | ITR 3–Not applicable (use ITR 4 if eligible) |
This table makes it clear: the presence of any business-related income—even from activities like F&O—makes ITR 3 mandatory.
When Is ITR 3 Mandatory for Capital Gains and Business Income?
While both ITR 2 and ITR 3 allow for the reporting of capital gains, the decision on which form to use depends on whether you also have business or professional income. The key factor to consider is the presence of business or professional income alongside your capital gains. Here’s when ITR 3 becomes mandatory:
If You Earn Capital Gains and Freelancing Income: If you earn income from both capital gains (e.g., from selling shares, mutual funds, or property) and freelancing (e.g., as a content creator, designer, or consultant), you must file ITR 3. Freelancing is considered business income, and once business income is involved, you are required to use ITR 3. Even if freelancing is your secondary source of income, it necessitates filing ITR 3 due to the business component.
If You Have Capital Gains Only (Salary or Rental Income): If your income consists only of capital gains (either short-term or long-term) along with salary or rental income, you can file ITR 2. ITR 2 is designed for individuals who do not have business or professional income but need to report complex sources of income, such as capital gains, multiple house properties, or foreign assets.
- If You Have Capital Gains and Trade in Derivatives: If you have capital gains and are involved in trading derivatives or futures & options (F&O), this is considered business income. Since trading in F&O is classified as a business activity, you must file ITR 3, even if your primary source of income is from capital gains. ITR 3 allows you to report business income alongside your capital gains, making it the correct choice for such cases.
The moment business or professional income enters your income profile, even if it’s secondary or part-time, you must opt for ITR 3. The Income Tax Department mandates this to ensure that all business-related income is properly reported. Filing ITR 2 in cases where business income is present can lead to an invalid or defective return, which would require revision and resubmission under ITR 3.
Read on some more aspects but refer to following specific references
Traders Engaging in F&O or Intraday Trading: Traders who engage in activities like futures & options (F&O), intraday trading, or commodity trading are considered to be running a business. Although such trading activities may appear similar to capital gains reporting, the tax treatment of such income is different. Income from F&O trading or intraday trades is categorized as business income because these activities are more structured and frequent than typical investing. Therefore, even if your primary income is from capital gains, if you trade in these financial instruments, you are required to file ITR 3.
- Importance of Choosing the Right Form: Filing ITR 3 for business income, including freelancing and trading, is crucial because this form allows you to declare and calculate business income correctly. It also provides the flexibility to claim deductions related to business expenses, such as office rent, professional fees, or the cost of equipment used in freelancing or trading activities. Incorrectly filing ITR 2 when you should file ITR 3 can lead to an incorrect tax assessment, delays in processing, and penalties for underreporting income.
Common Scenarios That Require ITR 3 Filing
Filing income tax returns (ITR) is a key obligation for taxpayers, and choosing the right ITR form is critical to ensure proper reporting of income. While ITR 1 and ITR 2 are suitable for individuals with simpler income sources, ITR 3 is required in certain scenarios where taxpayers have more complex sources of income. Below are some common situations where ITR 3 filing is necessary:
…………………………Frequent traders, or those trading in complex instruments like derivatives, must report their profits and losses under the “income from business and profession” section of ITR 3. Additionally, they can deduct transaction costs, brokerage fees, and other expenses incurred in generating income. For traders who occasionally dabble in the stock market, ITR 3 is still necessary if their trading activity crosses certain thresholds, making it imperative to properly classify their income.
In All Such Cases, ITR 3 is the Right—and Only—Option
In all of the scenarios above, ITR 3 is the right and only option to accurately report income and claim applicable deductions. Whether it’s a salaried individual with a side hustle, a retired professional working as a consultant, an NRI earning commission income, a young investor trading in the stock market, or a partner in a firm, ITR 3 caters to all these complex income scenarios. Even income from side hustles or gig economy work, which is increasingly common in today’s economy, triggers the need to file under this form. ITR 3 enables taxpayers to report various sources of income, claim deductions, and ensure their tax liability is calculated correctly.
However, individuals filing ITR 3, especially those with business or professional income, will face broader disclosure obligations. Here’s what’s new:
Asset & Liability Declaration Threshold Increased
Earlier, individuals with a total income exceeding ₹50 lakh were required to declare movable and immovable assets (cars, jewelry, shares, etc.) and liabilities. Now, this requirement has been raised to ₹1 crore. This update simplifies compliance for upper-middle-class taxpayers and removes the burden of detailed reporting for those earning just above ₹50 lakh.
However, for high-income professionals, traders, and business owners filing ITR 3, this disclosure remains mandatory—emphasizing the need for proper asset documentation.
Granular Deduction Reporting under Key Sections
Section-wise deductions must now be reported with more granularity. For example:
- Under Section 80C, each investment (ELSS, PPF, LIC premium, etc.) must be separately disclosed
- Section 10(13A) (HRA) and other exemptions now require detailed breakup and supporting fields
This aims to enhance data validation and reduce errors. Taxpayers filing ITR 3—who often combine business and personal investments—must ensure their deduction claims are precisely itemized and backed by records.
TDS Code Disclosure Now Mandatory
Taxpayers must now mention the exact TDS section code under which tax was deducted. For example:
- Section 194J for professional fees
- Section 194H for commissions
- Section 192 for salary
This change improves reconciliation between the taxpayer’s return and Form 26AS/TRACES. ITR 3 filers—who typically receive payments under multiple TDS categories—must match each entry accurately to prevent discrepancies or delayed refunds.
Collectively, these updates reflect a shift toward higher transparency and stricter compliance, especially for those with diverse income sources. Whether you’re a salaried professional with capital gains or a consultant juggling multiple clients, these changes mean your ITR filing needs to be sharper, better documented, and error-free.
Platforms like TaxBuddy make this process easier by auto-fetching data, mapping TDS sections, and structuring capital gains and deductions accurately—helping ensure that your return complies with the latest updates without confusion or oversight.
TaxBuddy: Simplifying the ITR Selection and Filing Process
TaxBuddy has emerged as a trusted name for accurate and assisted tax filing. It intelligently matches your income profile with the correct ITR form and auto-fetches information from Form 16, broker platforms, and other sources. For business professionals, traders, and freelancers, it simplifies complex reporting by mapping F&O trades and enabling seamless computation of business income. Whether you’re a salaried individual, consultant, or director in a company, TaxBuddy’s app ensures error-free filing, quick assistance, and post-filing support—all within a secure interface.
Conclusion
Understanding when to file ITR 3 instead of ITR 2 saves you from unnecessary complications and government notices. If you’re earning income from a business, partnership, trading, or freelance work—even on the side—ITR 3 is the correct and legal form to file. On the other hand, if your income is limited to salary, capital gains, and property without any business activity, ITR 2 remains appropriate.
For a secure, simple, and accurate filing experience, it’s wise to use guided platforms. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
Faqs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted ITR filing plans. You can choose to file your income tax return independently using their smart platform or opt for expert help to ensure accuracy and better tax planning.
Q2. Which is the best site to file ITR?
Several platforms allow online ITR filing, but TaxBuddy stands out for its AI-driven filing, expert support, post-filing notice assistance, and ease of use. It is especially useful for taxpayers dealing with multiple income sources or complex scenarios like business income or capital gains.
Q3. Where to file an income tax return?
You can file your income tax return on the official government portal (incometax.gov.in) or use authorized e-return intermediaries like TaxBuddy, which offers a guided, secure platform for online income tax filing.
Q4. What happens if I mistakenly file ITR 2 instead of ITR 3?
If you file ITR 2 while having business or professional income, the Income Tax Department may issue a defective return notice under Section 139(9). You’ll be required to revise and resubmit the return using ITR 3.
Q5. Can I file ITR 2 if I have done some part-time freelance work?
No, even part-time or occasional freelance income is treated as professional income. In such cases, you must file ITR 3 regardless of the income amount.
Q6. Is ITR 3 mandatory for F&O traders and speculative business income?
Yes, ITR 3 is mandatory for taxpayers earning income from F&O trades, speculative trading, or intra-day equity transactions. These are considered business income under the Income Tax Act.
Q7. I have only capital gains and salary. Which ITR form should I use?
If there is no business or professional income, and your sources include only salary, capital gains, and perhaps rental income or other sources like interest, ITR 2 is sufficient.
Q8. Can I carry forward business losses under ITR 2?
No, ITR 2 does not allow you to carry forward business or professional losses. To report and carry forward such losses, you must file ITR 3.
Q9. Is there a benefit to using TaxBuddy for ITR 3 filing?
Yes, TaxBuddy simplifies ITR 3 filing by auto-fetching income details from broker platforms, structuring business income, and calculating eligible deductions. It ensures error-free filing and helps avoid notice triggers from incorrect declarations.
Q10. Do I need to maintain books of accounts if I’m filing ITR 3?
If your business income exceeds the specified thresholds under Section 44AA, or if your turnover is above limits that require audit, maintaining books is mandatory. For smaller businesses or freelancers below audit limits, simplified disclosures are allowed under ITR 3.
Q11. Can I use ITR 3 even if I don’t have business income this year but had it last year?
Yes, you can still use ITR 3. However, if you have no business income for the current financial year, and your income is limited to salary, capital gains, or property, you may switch back to ITR 2.
Q12. Is it safe to file ITR through platforms like TaxBuddy?
Absolutely. TaxBuddy is an authorized e-Return Intermediary (ERI) by the Government of India. It follows strict data security protocols, encrypts all information, and offers a secure platform for seamless and accurate income tax return filing.
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