Taxmann's Analysis | Changes Introduced in the New ITR-3 and ITR-5 Forms Notified for A.Y. 2025-26
ITR-3 and ITR-5 Forms Notified Changes Introduced in the for Assessment Year 2025-26
The Central Board of Direct Taxes (“CBDT”) has notified the Income Tax Return (ITR) Form 3 and Form 5 for the Assessment Year (“AY”) 2025–26, applicable for income earned during the Previous Year (“PY”) 2024-25 (01-04-2024 to 31-03-2025).
Unlike in the last couple of years, when these forms were released well in advance, typically before March, the ITR forms have been released with a delay of more than a month. This created an anticipation that the department may have to extend the due date to file the return of income. This apprehension is based on the instructions given by the High Courts1 to the CBDT to extend the due date for filing income-tax returns so as to alleviate, to a certain extent, hardships caused to assessees on account of the delay in providing ITR filing utilities on time.
This article highlights the key changes in the revised ITR forms.
1 All Gujarat Federation of Tax Consultants vs. CBDT [2015] 61 taxmann.com 431 (Gujarat) and Vishal Garg vs. UOI [2015] 61 taxmann.com 418 (Punjab & Haryana)
1. Aadhaar Enrolment ID is Not Accepted
The Finance (No. 2) Act, 2024 amended Section 139AA of the Income-tax Act (“ITA”), with effect from 01-10-2024, restricting the use of the Aadhaar Enrolment ID in place of the Aadhaar number for PAN applications and Income-tax Returns.
In line with this amendment, Forms ITR-3 and ITR-5 have been updated to remove the reference to the Aadhaar Enrolment ID. Taxpayers are now required to provide their Aadhaar number/the Aadhaar number of partners, members, settlors, trustees, beneficiaries, and executors, as the case may be, when filing their returns, aligning with the new provisions under Section 139AA.
2. Change in Disclosure on Opting Out of the New Tax Regime of Section 115BAC
The ITR-3 and ITR-5, applicable for AY 2024–25, simply asked whether the assessee had exercised the option to opt out of the new tax regime under Section 115BAC(6) and required the date and acknowledgement number of Form 10-IEA if applicable.
The new ITR-3 and ITR-5, applicable for AY 2025–26, introduce a more detailed disclosure structure. They seek confirmation of past filings of Form 10-IEA and ask whether the assessee wants to continue opting out of the New Tax Regime in the current year.
3. Reporting of Income Declared Under the Presumptive Tax Scheme of Section 44BBC
To promote the cruise-shipping industry in India and make it an attractive global cruise tourism destination, the Finance (No. 2) Act, 2024 inserted a new presumptive tax scheme under Section 44BBC with effect from the AY 2025-26 providing special provision for computing profits and gains of the business of the operation of cruise ships in the case of non-residents. Under this scheme, 20% of the total amount received or receivable by, or paid or payable to, a non-resident cruise ship operator for carriage of passengers is deemed to be the profits and gains from that business.
To enable reporting of income under Section 44BBC, the following changes have been made under the ITR forms:
(a) The relevant declaration field under Part A- GEN is amended to indicate whether the taxpayer is declaring income under Section 44BBC.
(b) The Schedule BP has been updated to capture the amount of profit and gains deemed under Section 44BBC, similar to the existing reporting mechanism for other presumptive schemes like Sections 44B and 44BBA.
It is important to note that a tax audit under Section 44AB is generally not required when income is declared under a presumptive taxation scheme. While Section 44AB specifically excludes the assessee declaring income under Section 44B from tax audit, there is no such
express exclusion for Section 44BBC, even though it is analogous to Section 44B. However, the new ITR forms treat Section 44BBC in the same way as Section 44B. This suggests that tax audit may also not be required for those declaring income under Section 44BBC.
4. Changes Due to the Amendments Made by
the
Finance (No. 2) Act, 2024 for Taxation of
Capital Gains
As per Section 45(1), capital gains are taxable in the year in which a capital asset is transferred. This means the date of transfer plays a critical role in determining the applicable tax provisions.
With the enactment of the Finance (No. 2) Act, 2024, significant changes to the capital gains tax regime have come into effect from 23rd July 2024. Therefore, when filing your return for AY 2025-26 (i.e., for FY 2024-25), it’s important to check whether the asset was transferred before or after this date, as this will impact the tax computation.
If the transfer date is before 23rd July 2024, the old tax provisions will continue to apply, including the 15% tax rate on STCG covered under Section 111A, the 20% tax rate on LTCG covered under Section 112 with indexation benefit, and the 10% tax rate on LTCG under Section 112A.
However, if the transfer occurs on or after 23rd July 2024, new tax provisions will apply as follows:
(a) The tax rate on short-term capital gains covered under Section 111A will be 20% instead of 15%.
(b) A uniform tax rate of 12.5% will apply to long-term capital gains under Section 112, and no indexation benefit will be available on such gains. However, a grandfathering provision is introduced for land or buildings acquired before 23rd July 2024 and transferred on or after that date for resident individuals/ HUF.
(c) The tax rate on long-term capital gains covered under Section 112A will be 12.5% rather than 10%.
(d) The tax rates on capital gains for non-residents have also been amended, which are consistent with changes to Sections 111A, 112, and 112A.
Consequential changes have been made to Forms ITR-3 and ITR-5 for the assessment year 2025-26. The return requires disclosure of the date of transfer, separate reporting for transfers made before and on or after 23rd July 2024, and the proper application of revised tax rates and indexation rules.
5. Reporting of Capital Gains from Unlisted Bonds and Debentures As STCG or LTCG Based on the Transfer Date
The Finance Act 2023 introduced a new Section 50AA, effective from AY 2024-25, to bring Market Linked Debentures (MLDs) and Specified Mutual Funds (SMFs) under a special capital gains regime. Any gain arising from the transfer, redemption or maturity of a unit of such specified mutual funds or market-linked debentures is treated as short-term capital gains and is taxable at the rate applicable to the assessee.
The Finance (No. 2) Act 2024 expanded the scope of Section 50AA. Effective from 23rd July 2024, the provision also includes unlisted debentures and unlisted bonds. Therefore, if unlisted debentures or bonds were issued on or before 22nd July 2024 but redeemed, matured, or transferred on or after 23rd July 2024, the entire gain will be taxed as shortterm capital gains, regardless of the holding period.
Therefore, if the transfer occurs before 23rd July 2024, the resulting gain will be classified as long-term and taxable according to the old provision. However, if the transfer takes place on or after 23rd July 2024, that gain will be considered short-term and subject to taxation under Section 50AA.
Consequential changes have been made to Form ITR-3 and ITR-5 for the assessment year 2025-26.
6. Reporting of
Buy-back Proceeds As Deemed
Dividend Starting 1st October 2024
Until 30th September 2024, when a domestic company bought back its own shares, it was required to pay additional tax under Section 115QA on the income distributed. In that case, the amount received by the shareholder was exempt under Section 10(34A), and the shareholder had no further tax liability.
The Finance (No. 2) Act 2024 reversed this approach. Effective from 01-10-2024, the entire consideration received by shareholders on the buy-back of shares by a domestic company will be taxed in the hands of the shareholders as a deemed dividend under Section 2(22) (f). As a result, shareholders will have to pay tax on the full amount received from the buyback. For the calculation of capital gains, the consideration is considered to be nil. The net outcome of the calculation will result in a capital loss.
Consequential changes have been made to Form ITR-3 and ITR-5 for the assessment year 2025-26. The taxpayers will report buy-back proceeds as dividend income in Schedule OS and show nil consideration for capital gains, resulting in a notional capital loss in Schedule CG.
7. Withdrawal of Section 80-IC Deduction Schedule
Section 80-IC of the ITA allows a deduction to any assessee deriving profits and gains from manufacturing or producing specified articles or things in a new unit or an existing unit after substantial expansion. The deduction shall be allowed for 100% of the profits in the first 5 years and 25%/30% of the profits in the next 5 years, provided the unit commenced operations or substantial expansion between 07-01-2003 and 31-03-2012.
If an assessee commenced a manufacturing unit in the FY 2011–12, the deduction under Section 80-IC would be available up to AY 2021–22. However, since the deduction period has lapsed, the Schedule for claiming deduction under Section 80-IC has been removed from Form ITR-3 and ITR-5.
8. Reporting of Disability Certificates for Deductions Under Sections 80DD and 80U
The deduction under Section 80DD is available to a resident individual or Hindu Undivided Family (HUF) who incurs medical expenditure or pays an insurance premium for the care of a dependent family member with a disability or severe disability.
The deduction under Section 80U is available to a resident individual who is suffering from a disability or severe disability.
In cases where the assessee or his dependent is suffering from autism, cerebral palsy, or multiple disabilities, he is required to obtain a certificate issued by the medical authority in Form 10-IA. For other types of disabilities, the assessee must obtain a disability certificate in accordance with the guidelines issued by the expert committee.
In the previous ITR Form-3, taxpayers could enter the acknowledgement number of Form 10-IA only, while there was no facility to report the acknowledgement number of certificates for other disabilities. However, the new ITR Form-3 has introduced a separate column to provide this information as well.
9. Reporting of Pass-Through Income As Per Section 115U
Venture Capital Funds and Venture Capital Undertakings are allowed a pass-through status under the ITA. If such funds are covered under the definition of investment fund, being a Category-I or II AIF, as specified under Section 115UB, all incomes (except business income) can be passed to the investors. The VC funds and undertakings that are not covered under Section 115UB are allowed pass-through status under Section 115U.
Until now, there was no reference to Section 115U in Schedule PTI of the ITR forms. Thus, investors of venture capital funds/undertakings covered under Section 115U were not required to report pass-through income under Schedule PTI
The new ITR-3 and ITR-5 addressed this issue by including a reference to Section 115U in Schedule PTI, thereby enabling taxpayers to correctly report pass-through income received from venture capital funds/ undertakings covered under Section 115U.
10. Scope of Audit Disclosure Requirement in Schedule 5A Expanded
Schedule 5A of ITR-3 pertains to the apportionment of income between spouses governed by the Portuguese Civil Code. In the previous assessment years, the ITR-3 form limited its disclosure requirement to whether the spouse’s accounts were audited under Section 44AB or if the spouse was a partner in a firm subject to audit under that section.
However, Schedule 5A in the new ITR-3 has expanded this scope. It now seeks disclosure of whether the spouse’s accounts are audited under any provision of the ITA (excluding Section 92E) or under any other applicable laws.
11. Schedule AL is Applicable If the Total Income Exceeds Rs. 1 Crore
Schedule AL, in the ITR-3 form, is used to report the taxpayer’s assets and liabilities. In the form ITR-3, applicable till AY 2024-25, a taxpayer with a total income exceeding Rs. 50 lakh was required to disclose his assets and liabilities at the end of the year. In the new ITR-3 form, this requirement now applies only to individuals whose total income exceeds Rs. 1 crore.
12. Schedule TDS Requires Disclosure of the TDS Section
In the new ITR Form-3 and Form-5, taxpayers are required to mention the specific section under which TDS has been deducted. This detail will be furnished in the Tax Payment schedule.
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