Income Tax Act 2025: New Draft Rules for ITR-1 to ITR-7 Released

In a significant move to overhaul India's direct tax landscape, the Central Government has released the draft of the Income Tax Rules 2026 under the new Income Tax Act 2025. This new legislation is set to replace the decades-old Income Tax Act 1961 starting April 1, 2026. The draft outlines comprehensive changes to the eligibility criteria and filing procedures for all return forms, ranging from ITR-1 to ITR-7. The primary objective behind this transition is to enhance data transparency and streamline the tax compliance process through advanced digital integration.

Mandatory Digital Filing and ITR-1 Standards

According to the draft rules, the process of filing income tax returns has been shifted almost entirely to the digital domain. Paper filing will now be restricted exclusively to super senior citizens aged 80 years or above. All other categories of taxpayers will be required to file their returns online using either an Electronic Verification Code (EVC) or a Digital Signature. ITR-1 (Sahaj) remains the simplest form but is strictly reserved for resident individuals with income from salaries, one house property, and interest. The government has emphasized that taxpayers with complex financial transactions must now work with higher-tier forms to ensure accurate reporting.

Enhanced Disclosure Requirements for ITR-2 and ITR-3

ITR-2 will now serve as the default option for individuals who don't have business income but possess complex tax profiles. This includes taxpayers with capital gains, multiple house properties, or foreign income and assets. The draft rules mandate more granular details regarding foreign assets to curb tax evasion. Similarly, ITR-3 remains the primary form for those earning from a business or profession. According to analysts, ITR-3 now includes additional data columns for perquisites and specific income categories, allowing the tax department to perform more precise cross-verification of reported data.

Stringent Eligibility Criteria for ITR-4 (Sugam)

The most notable restrictions in the proposed rules apply to ITR-4 (Sugam), which is used for presumptive taxation. The eligibility for this form has been Notably narrowed. Taxpayers with an annual income exceeding ₹50 lakh, those holding directorships in companies, or individuals possessing unlisted equity shares will no longer be eligible for ITR-4. Also, individuals with foreign assets or more than two house properties are also excluded. Analysts suggest that these changes will compel many small traders and professionals to switch to ITR-3, which requires more exhaustive documentation and auditing.

Compliance for Institutional and Corporate Returns

Forms ITR-5, ITR-6, and ITR-7, used by firms, companies, and trusts, have also seen updates aimed at increasing transparency. Under ITR-7, charitable trusts and political parties must now link their donation and fund utilization data directly with their audit reports. For business reorganizations, ITR-A has been integrated, while ITR-BL will handle block assessments. Government officials state that these measures are designed to ensure that tax exemptions are granted only to eligible entities and that the flow of funds is strictly monitored through digital trails.

Analytical Perspective and Future Implementation

Tax experts and analysts view the draft of the Income Tax Act 2025 as a major step toward modernizing tax administration. While the mandatory digital filing is expected to accelerate return processing, experts note that the stricter conditions for ITR-4 may increase compliance costs for small-scale taxpayers. The government has placed these draft rules in the public domain for feedback until February 22, 2026. Following the review of these suggestions, the final rules will be notified. This transition marks the beginning of an era characterized by transparent, data-driven, and detailed financial reporting for all Indian taxpayers.