The Income Tax Department has released Draft Income Tax Rules 2026 introducing significant changes to income tax return forms for the upcoming tax year 2026-27. According to The Times of India, the new rules expand eligibility parameters for ITR 1 and 4 forms, allowing taxpayers to own up to 2 properties instead of the previous limit of 1 property. The negative list has been expanded to include certain other income streams such as transfer of carbon credits, VDA, and online gaming income. As reported by Grant Thornton Bharat LLP's Richa Sawhney, these changes are expected to further carry forward the theme of simplification and ease of compliance.
The draft rules emphasize technology integration and pre-filled information to reduce compliance time and errors. According to Mainstay Tax Advisors' Kuldip Kumar, the redesign of forms, increased use of pre-filled information, and automated linkages will significantly simplify compliance. The new rules have been drafted to ensure they are simple to comprehend and easy to comply with for all categories of taxpayers. As reported by Grant Thornton Bharat LLP, the number of rules and forms has been significantly reduced, with the focus on technology ensuring forms are pre-filled and reconciled to reduce time spent on compliances.
The draft rules allow ITR-1 and ITR-4 where long-term capital gains under section 198 don't exceed ₹1.25 lakh and there are no carry-forward losses. According to The Times of India, retail investors trading actively through SIPs, direct equities, and digital platforms face challenges in tracking capital gains and losses. CA Chintan Ghelani noted that even routine SIP redemptions or equity trades can generate capital gains or losses affecting whether simplified forms remain available. The difficulty is manageable with proper record-keeping and annual review, but investors who trade frequently face higher risks of overlooking disqualifying triggers.
Taxpayers must carefully evaluate eligibility each year rather than assuming continuity, as twelve specific disqualifications exist for ITR-1 and fifteen for ITR-4. As reported by The Times of India, even a single change such as acquiring foreign assets, holding unlisted shares, becoming a director, or crossing the ₹50 lakh income threshold can immediately alter applicable return forms. OP Yadav emphasized that eligibility is not static - a taxpayer eligible in the previous year may become ineligible due to changes in income composition or asset holdings. Incorrect form selection can trigger formal defect notices requiring timely rectification.
According to The Times of India, Draft Rule 164(12) prescribes filing methods with companies required to file electronically under digital signature. Individuals aged 80 years or more can file in paper form for ITR-1 or ITR-4. The rules include provisions for defective returns - a return will be treated as defective if all fields are not filled, audit reports are not furnished, or MAT/AMT credits are not in accordance with last ITR. Recent data shows active enforcement with considerable notices issued for incorrect ITR form selection in Assessment Year 2025-26, demonstrating that tax administration actively verifies form eligibility.