ITR-1 for two houses draft rules
- ITR-1 for Two Houses Draft Rules: Conditions You Must Know
For years, the rule of thumb for Indian taxpayers was simple but restrictive: if you owned a second home, you had to say goodbye to the simplicity of ITR-1 (Sahaj) or ITR-4 (Sugam). The moment you had income from more than one house property, the tax department nudged you toward the more complex ITR-2 or ITR-3. But a quiet revolution is underway in the draft rules for 2026, and it promises to change the game for salaried individuals and small business owners alike.
The draft Income-tax Rules 2026 have proposed to allow taxpayers owning up to two houses to file their returns in ITR-1 and ITR-4, provided they meet other conditions.
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The Draft Income Tax Rules 2026 have proposed a significant relaxation: taxpayers may now own up to two house properties and still be eligible to use the simplified return forms, ITR-1 and ITR-4 .
If you are a dual-home owner currently dreading the jump to a more detailed return, this news might feel like an early tax refund. But before you pop the champagne, it is crucial to understand that this new eligibility comes with a strict set of conditions. It is not a free-for-all, but rather a carefully calibrated simplification measure.
Let’s break down what these draft rules mean for you, the specific conditions you must meet, and how to ensure you don’t accidentally file the wrong form and end up with a “defective” return.
The Big Shift: Why This Change Matters[ITR-1 for two houses draft rules]
To understand the significance of this shift, we have to look back. Traditionally, the eligibility for ITR-1 and ITR-4 required that the taxpayer does not own more than one house property . This meant that if you owned a second property—even if it was a self-occupied holiday home or a small apartment inherited from your parents—you were forced to file ITR-2.
ITR-2 is not terrifying, but it requires detailed disclosures, particularly regarding capital gains and, in some cases, foreign assets. For a salaried employee with just an extra flat lying vacant, this often felt like overkill.
The new draft rule (Rule 164) changes this. It explicitly provides for the ownership of two properties to exercise return filing under ITR-1 and ITR-4 . This aligns with the Budget 2025 announcement that allowed taxpayers to treat two self-occupied properties as having nil annual value, removing the concept of “deemed rental income” on the second self-occupied home .
Condition 1: Only Two Properties—And They Must Be “Right”
The most obvious condition is the cap: you can only own two house properties. If you own three or more, you are immediately disqualified from using these simplified forms and must file ITR-2 .
But here is where it gets interesting. The draft rules are evolving alongside the new Income Tax Act’s approach to how these properties are classified. While the forms themselves are not yet fully redesigned, experts suggest that the eligibility will likely consider the nature of these properties.
- Self-Occupied vs. Let-Out: You can have two self-occupied properties (where the annual value is nil). Alternatively, you could have one self-occupied and one let-out property, or both let-out.
- No Business Income: For ITR-1, your primary income must still be from salary or pension. For ITR-4, you can have presumptive business income, but you cannot be in the regular business income category.
Personal Insight: I remember helping a friend file his return last year. He was a software engineer with a salary, lived in a rented apartment in Bangalore, and owned a flat in his hometown (which was locked) and a small studio apartment in Pune that he rented out. He technically owned two rental properties (though one was vacant). The sheer confusion of marking one as “deemed let-out” forced him into ITR-2. Under the new draft rules, he could potentially consolidate this under ITR-1, provided his total income stays under the limit.
Condition 2: The ₹50 Lakh Income Ceiling Remains
Just because you can now own two houses doesn’t mean the income limits have been thrown out the window. The draft rules retain the total income cap of ₹50 lakh for both ITR-1 and ITR-4 .
If your total income (including rental income from both properties) exceeds ₹50 lakh, you cannot use these simplified forms. This is a hard stop.
Condition 3: Capital Gains—Only Up to a Point
This is a condition that trips up many unsuspecting taxpayers. Both ITR-1 and ITR-4 allow for the inclusion of Long-Term Capital Gains (LTCG), but only up to a specific limit and from specific sources.
You are allowed to report LTCG up to ₹1.25 lakh under Section 112A (arising from the sale of listed equity shares or equity-oriented mutual funds where Securities Transaction Tax has been paid) .
However, if you have:
- Short-term capital gains (STCG)
- Capital gains from selling a house property (real estate)
- LTCG exceeding ₹1.25 lakh
…then you cannot use ITR-1 or ITR-4. You must file ITR-2 . So, if you sold one of those two houses during the year and made a profit, the simplified forms are off the table.
Condition 4: The Negative List—What Still Disqualifies You
While the rule on house property has relaxed, many other disqualifications remain. These are the “negative lists” that haven’t gone away. You cannot use ITR-1 or ITR-4 if you :
- Are a Director in a company.
- Have invested in unlisted equity shares.
- Have foreign assets or foreign income (including signing authority in a foreign bank account).
- Have agricultural income exceeding ₹5,000.
- Are a Non-Resident Indian (NRI) or Resident but Not Ordinarily Resident (RNOR) .
- Have deferred income tax on ESOPs received from an eligible start-up.
ITR-1 vs. ITR-4: Which One for the Business Owner with Two Houses?
The choice between ITR-1 and ITR-4 hinges on the source of your income, not just your property count.
- ITR-1 (Sahaj): Choose this if you are a salaried individual or a pensioner. You can have two houses and interest income, but no business income .
- ITR-4 (Sugam): Choose this if you are a freelancer, small business owner, or professional opting for the presumptive taxation scheme under Sections 44AD, 44ADA, or 44AE . You can still have two houses, a salary, and business income—provided that business income is calculated on a presumptive basis (e.g., 50% of gross receipts for professionals) .
Expert Insight: CA Chintan Ghelani, partner at N.A. Shah Associates, notes that eligibility is not static. “Even a single change such as acquiring foreign assets, holding unlisted shares, becoming a director, or crossing the income threshold can immediately alter the applicable return form” . This means that while you might qualify for ITR-4 this year with two houses and a freelancing income, if your freelancing receipts cross ₹50 lakh next year, you are pushed into ITR-3.
The “Deemed Let-Out” Trap and How to Navigate It
Even with the relaxation allowing two self-occupied properties, a common tax twist remains: the “deemed let-out” property.
If you own two houses and live in both of them at different times (or keep one vacant), you can treat both as self-occupied, and no notional rent is taxed . However, if you own three houses, the third one is deemed to be let out, even if it’s lying vacant. You must pay tax on the notional rental income it could have earned.
How the New Rules Help: Previously, if you owned two houses, you had to pick one as self-occupied and the second as “deemed let-out” (paying tax on notional rent). Now, you can declare both as self-occupied and save that tax . This is a massive relief for families maintaining homes in their hometown and their city of work.
Practical Steps: How to Prepare for Filing Under the New Rules
If you plan to take advantage of these draft rules (once officially notified), here is how to prepare:
- Get Your Loan Statements: For each house property, gather the interest certificates. For self-occupied properties, you can claim a deduction of up to ₹2 lakh on the interest paid . For let-out properties, there is no upper limit on interest deduction, but the loss set-off against other income is capped at ₹2 lakh.
- Municipal Tax Receipts: Keep proof of municipal taxes paid. These are deductible from rental income (or notional income) .
- Review Your AIS (Annual Information Statement): Ensure the rental income shown in your AIS matches what you are declaring. Mismatches are a leading cause of income tax notices .
- Check Your Directorship Status: If you became a director in a company during the year, you cannot use ITR-1 or ITR-4, regardless of how many houses you own .
The Bottom Line: Simplicity with Strings Attached
The move to allow ITR-1 and ITR-4 for owners of two house properties is a welcome step toward rationalizing tax compliance. It acknowledges the reality of the modern Indian middle class, where owning a second home—whether for aging parents, a second job location, or investment—is no longer a rarity reserved for the super-rich.
However, as tax expert Kuldip Kumar points out, “stricter monitoring of taxpayer eligibility for the respective forms may be introduced, supported by increased digitisation” . The government is making it easier for you, but the system is watching more closely than ever.
So, can you use ITR-1 with two houses? Under the draft rules, yes—provided you meet all the other conditions regarding income limits, capital gains, and the negative list.
Filing taxes is rarely a set-and-forget activity. Review your eligibility every year. Your income profile changes, and so do the rules. This time, however, the change is finally in the taxpayer’s favor.
Also read: Your Lifestyle Inflation Hourly Rate: The Hidden Cost of Every Upgrade 2026
What do you think about this proposed relaxation? Do you own two homes, and will this make filing easier for you? Share your experience in the comments below! If you found this guide helpful, consider subscribing to our newsletter for more clear, jargon-free tax updates.