ITR-2 (Income Tax Return-2)

What is ITR-2?

ITR-2 is an income tax return form used by individuals and HUFs who have income from sources such as salary, pension, capital gains, multiple house properties, and foreign assets, but do not earn income from business or professional activities. It is intended for taxpayers who have more varied income sources that require detailed reporting.

ITR-2 allows for reporting various types of income and deductions, making it more versatile than ITR-1. It includes sections for capital gains, income from other sources, and foreign income, making it appropriate for people with more complex financial portfolios.

Who Files ITR-2?

ITR-2 must be filed by individuals and HUFs who meet the following criteria:

• Income from Salary or Pension: The taxpayer has income from salary or pension, similar to those who file ITR-1.
• Income from House Property: Individuals with income from more than one house property (self-occupied, let-out, or rented).
• Income from Capital Gains: Taxpayers who have earned short-term or long-term capital gains from the sale of assets like stocks, bonds, mutual funds, or property.
• Foreign Income and Assets: Individuals with foreign income or those who own foreign assets, bank accounts, or financial interests outside India.
• Income from Other Sources: Individuals who earn income from sources such as dividends, lottery winnings, or interest from fixed deposits.
• Resident and Non-Resident Individuals: This form is applicable to both residents and non-residents. Unlike ITR-1, Resident but Not Ordinarily Resident (RNOR) and Non-Resident Indian (NRI) individuals can file ITR-2.

Individuals who cannot file ITR-2:

• Individuals who earn income from a business or profession, including freelancers, must file ITR-3 or ITR-4.

Structure of ITR-2

The ITR-2 form is detailed and divided into multiple sections to capture income from different sources:

1. Personal Information: This section gathers essential information about the taxpayer, including PAN, Aadhaar number, residential status, contact information, and bank account details.
2. Income Details:
   1. 1. Income from Salary or Pension: Report income received from employment or pension. This section also allows for exemptions under Section 10, such as HRA, and standard deductions.
      2. Income from House Property: If you own more than one house property, either self-occupied or rented out, you must report the income or loss here.
      3. Income from Capital Gains: Taxpayers must report short-term and long-term capital gains from the sale of property, stocks, mutual funds, etc. The tax treatment of these gains depends on the holding period of the asset.
      4. Income from Other Sources: Interest from savings accounts, fixed deposits, dividends, lottery winnings, etc., are included in this section.
3. Deductions and Exemptions:.
   1. 1. Section 80C: Deductions for investments in PPF, life insurance, fixed deposits, etc.
      2. Section 80D: Deductions for medical insurance premiums.
      3. Other Deductions: Additional deductions under sections like 80E (education loans), 80TTA (interest on savings accounts), and 80G (donations).
4. Tax Calculation and Payments: Based on the income and deductions, this section calculates the total tax payable. Taxpayers must report the taxes paid via TDS, advance tax, or self-assessment tax.
5. Foreign Assets and Income: Taxpayers must declare any foreign assets they hold, such as bank accounts, real estate, or financial interests in overseas companies. They must also report income from foreign sources.
6. Tax Payment Verification: Similar to other ITR forms, this section ensures that all taxes paid by the taxpayer are correctly credited.

Filing Process for ITR-2

The process for filing ITR-2 is similar to other tax returns:

Online Method: Taxpayers can file ITR-2 electronically through the Income Tax Department's official portal. The form is pre-filled with some details like salary and TDS, which taxpayers must verify and fill in the rest. Once filled, it can be submitted online with verification done via Aadhaar OTP, net banking, or sending a physical copy of ITR-V to the CPC.
Offline Method: As with ITR-1, senior citizens over 80 years of age can file ITR-2 via a paper return.

Example:

Consider an individual who earns a salary of ₹25 lakh annually, has income from two house properties (one self-occupied and the other rented), and also realizes capital gains from selling mutual funds. This individual also has income from dividends and interest on a fixed deposit. Since their income sources include capital gains and multiple house properties, they would need to file ITR-2.

Benefits of Filing ITR-2:

Comprehensive Reporting: ITR-2 allows taxpayers with complex income sources like capital gains and foreign assets to comprehensively report their income.
Refund Claim: As with other ITR forms, taxpayers can claim refunds for excess TDS deductions once their actual tax liability is computed.
Foreign Income Reporting: This form allows taxpayers to comply with regulations regarding foreign income and assets, ensuring transparency and reducing the risk of non-compliance penalties.
Easy Loan and Visa Applications: Filing ITR-2 is essential for individuals applying for high-value loans or visas since it serves as proof of comprehensive financial reporting.

Challenges:

More Complex: ITR-2 is significantly more complex than ITR-1. Taxpayers with multiple sources of income must carefully report all details to avoid penalties or notices from the Income Tax Department.
Foreign Assets Reporting: Individuals with foreign assets need to be careful about filling out the foreign asset and income section correctly. Any errors in reporting foreign income could lead to penalties.
Lack of Simplification: Unlike ITR-1, which is simple and can be filed quickly, ITR-2 takes more time to prepare due to the level of detail required.

Common Deductions Claimed in ITR-2:

Here are the common deductions allowed under ITR-2:

• Section 80C: Investments in PPF, ELSS, LIC premiums, etc.
• Section 80D: Health insurance premiums for self, spouse, children, and parents.
• Section 80G: Donations to approved charitable institutions.
• Section 80TTA/80TTB: Deduction for interest earned on savings accounts (for individuals) or fixed deposits (for senior citizens).

Tips for Filing ITR-2:

• Organize Documents: Keep all necessary documents, such as Form 16, capital gains statements, and foreign asset details, readily available before starting the filing process.
• Verify Tax Credits: Ensure that all TDS and tax payments are accurately reflected in Form 26AS.
• Foreign Income Accuracy: If you have foreign income or assets, report them carefully, including any tax credits claimed under international tax treaties.
• Check Capital Gains: If you have investments in mutual funds or stocks, ensure that short-term and long-term capital gains are reported correctly.