The Central Board of Direct Taxes (CBDT) has recently introduced the draft Income-tax Rules, 2026, in alignment with the Income-tax Act, 2025, which will come into effect on 1 April 2026. The draft rules, now open for public consultation until February 22, 2026, propose significant procedural and eligibility changes to the suite of Income Tax Return (ITR) forms from ITR-1 to ITR-7. Aimed at operationalising the switch from the six-decade-old Income-tax Act of 1961, the rules emphasise digital compliance, precise taxpayer categorisation, and transparency, affecting individuals and institutions alike.
The Central Board of Direct Taxes (CBDT) is expected to notify the draft income tax rules by the first week of March. However, taxpayers filing returns for the Assessment Year (AY) 2026–27 will continue to follow the existing forms and provisions under the Income Tax Act, 1961, CBDT sources said.
What changes with Income-tax Act, 2025
While the familiar structure of ITR-1 to ITR-7 remains, the draft rules introduce sharper eligibility conditions for each form. For most taxpayers, electronic filing is mandated, with paper returns permitted only for super senior citizens aged 80 or above. All other filers must submit digital returns, either by electronic verification code or digital signature. The government stresses that the transition will not merely update the numbering or structure but will redefine how taxpayers qualify for simplified forms and detail their financial disclosures under the new law.
ITR-1
ITR-1 (Sahaj) continues as the default for resident individuals with straightforward income sources such as salary, one residential property, and other income like interest. The draft rules reaffirm that ITR-1 is reserved for the simplest scenarios. Taxpayers with complexities such as multiple house properties or foreign income will be required to use other forms. The approach reflects the administration’s intent to tightly control eligibility for the most streamlined return, ensuring its use is limited to its intended audience.
ITR-2
For individuals and Hindu Undivided Families (HUFs) with more complex income situations, ITR-2 becomes the default. This form now serves those with capital gains, income from multiple properties, or foreign assets, excluding those with business or professional income. The new capital gains framework and foreign asset rules introduced in the Income-tax Act, 2025, are expected to make ITR-2 more disclosure-intensive, with the government focusing on capturing structured data for better oversight and compliance.
ITR-3
ITR-3 is mandated for those with business or professional income who do not qualify for presumptive taxation or simplified returns. The draft rules highlight expanded disclosure requirements, particularly for professionals, business owners, and high-income individuals. The new rules clarify that heavier and more detailed disclosures will be expected, particularly around perquisites, capital gains, and special income categories. This move is designed to ensure the tax administration can effectively monitor complex financial activity, especially as the economy diversifies.
ITR-4 (Sugam)
ITR-4 (Sugam), traditionally viewed as a simplified option for small business owners and professionals under presumptive taxation, faces its most substantial tightening yet. The draft rules explicitly bar taxpayers from using ITR-4 if they have foreign assets or income, act as company directors, hold unlisted equity shares during the year, earn over ₹50 lakh, own more than two house properties, have carried-forward losses, or have agricultural income exceeding ₹5,000. As stated in the draft rules, “In short, ITR-4 is no longer a “one-size-fits-all” shortcut. Many small business owners and professionals who earlier used Sugam may now be pushed into ITR-3.”
ITR-5 and ITR-6
For entities such as firms, limited liability partnerships (LLPs), associations of persons (AOPs), and companies, ITR-5 and ITR-6 largely retain their previous structure but are now subject to deeper compliance requirements. The draft rules reinforce the use of digital filing for companies and strengthen the link between audit reports and return submissions. There is also closer integration with new forms such as ITR-A, for business reorganisations, and ITR-BL, for block assessment cases, reflecting broader efforts to streamline tax reporting for complex business entities.
ITR-7
ITR-7, which applies to charitable trusts, political parties, and other exempt institutions, is subject to heightened scrutiny and electronic compliance. The draft rules require tighter linkage between audit reports, donation disclosures, and fund utilisation within the return. Filing deficiencies or delays may now directly threaten an entity’s registration or exemption status, with the government reinforcing a substance-over-form approach to ensure transparency and accountability among institutions benefiting from tax-exempt status.
Across all ITR forms, the government’s message is consistent: electronic filing is now the standard, simplified returns are restricted to narrowly defined groups, and disclosure requirements are expanding. The tax administration will depend more heavily on structured data to monitor compliance and reduce loopholes. Stakeholders are encouraged to review the draft rules and submit feedback by the 22 February 2026 deadline, after which the finalised provisions will govern the filing process from the 2026-27 assessment year.
