Background and Rationale

Central Board of Direct Taxes (CBDT) has notified the Income-tax (Twelfth Amendment) Rules, 2025, introducing significant changes to the income tax return filing framework for Assessment Year (AY) 2025–26. These changes are intended to broaden the eligibility for filing simplified ITR forms and to enhance procedural compliance. This initiative aligns with the government’s ongoing focus on ease of filing for small taxpayers and digitisation of compliance systems.

One of the most notable updates is the inclusion of capital gains under Section 112A (long-term capital gains on equity shares and units of equity-oriented funds) up to ₹1.25 lakh within the purview of ITR-1 and ITR-4, allowing more taxpayers to avoid using the more complex ITR-2 or ITR-3 forms. Additionally, enhanced compliance requirements have been introduced, such as mandating submission of Form 10BA for rent deductions.

Amendments and Their Implementation

• Rule 12 – Return Filing Rules
  • Sub-rule (1) now reflects the AY 2025–26 update – changing “2024-25” to “2025-26”
  • sub-clause (iv) added to Rule 12(1)(a) to allow individuals with only long-term capital gains under Section 112A not exceeding ₹1.25 lakh to use ITR-1, provided they have no carry forward or brought forward losses.
  • Clause (ca) has been revised to allow individuals, HUFs, or firms eligible for presumptive taxation under Sections 44AD/44ADA/44AE with minor LTCG under Section 112A (up to ₹1.25 lakh) to continue using ITR-4 (Sugam).

• Rule 11B –Taxpayers claiming deduction for rent paid under Section 80GG must now submit Form 10BA with the return, integrating documentation into the filing system and eliminating post-filing validation delays.

• Appendix II –ITR Forms

ITR-1 (Sahaj) and ITR-4 (Sugam) forms have been substituted to reflect:

1. Fields for reporting LTCG under Section 112A up to ₹1.25 lakh.
2. A more structured digital layout supporting updated compliance.
3. Detailed schedules for deductions, capital gains, presumptive income, GST turnover, and exempt income.

Implications and Future Prospects

These changes acknowledge the growing trend of retail participation in equity markets and make return filing more inclusive for taxpayers earning modest capital gains. It also furthers the government’s commitment to simplified tax compliance under the Digital India initiative. Future revisions may continue to integrate more real-time reporting and smart validations into ITR forms.

Moreover, by enforcing document submission such as Form 10BA, the department signals a shift toward real-time documentation as part of the return rather than post-filing processes, which will likely extend to more forms in the future.

Conclusion

Notification No. 40/2025 represents a progressive step by the CBDT towards rationalising return filing for Assessment Year 2025–26. By enabling reporting of limited long-term capital gains in simplified ITR forms and reinforcing mandatory form submissions with returns, it balances ease of compliance with improved regulatory oversight. This change will be particularly welcomed by salaried taxpayers and small firms with modest investments, simplifying their filing journey.