Tax Year in India: Understanding the New Concept

Q: How are Previous Year and Assessment Year referred to in the new Bill?

The phrase 'Subsequent Tax Year' has replaced 'Assessment Year.' Thus, the aforementioned word may be used in the new bill wherever it is necessary to refer to the assessment year. For example, the assessment year is when the tax returns are filed. The phrase 'assessment year' has been replaced in the new tax bill with 'financial year succeeding to the relevant tax year.'

Nimisha Panda
2 days ago
6 min read

On February 13, 2025, the Final Income Tax Bill 2025 was introduced to Parliament. The establishment of the Tax Year, which takes the place of the Financial Year (FY) and Assessment Year (AY), is one of the main modifications in this measure. All taxpayers who are required to file their income tax returns electronically must comprehend this idea. The goal of this move is to make it easier for taxpayers nationwide to comply with tax laws. This article will explain the new Income Tax Bill 2025's Tax Year and its effects on both individuals and corporations.

What is a Tax Year?
Why Has Tax Year Been Introduced?
Relevant Years under the Current Income Tax Law
Impact of Tax Year on ITR Filing
Tax Year vs. Previous Year vs. Assessment Year: A Comparison
Conclusion
Frequently Asked Questions

What is a Tax Year?

In the Income-tax Act of 1961, the phrase "previous year" was replaced with the term "tax year," which refers to a 12-month period within a fiscal year. Since the "assessment year" was eliminated in the Income-tax Bill, the "tax year" will now be utilised to evaluate income or total income as well as establish the appropriate income tax rates. Because they are related to separate financial years, the terms "previous year" and "assessment year" used to be confusing. The following year's tax year will begin on April 1st and terminate on March 31st. The new provisions are:

If you launch your business in the middle of the year, your tax year starts on that day and ends on March 31st.
The Tax Year for any income that comes from a new source (such as investments or rental property) begins on the day you start making money.

The phrase "financial year" has not completely substituted "previous year" and "assessment year," as a tax year may occasionally be shorter than a financial year. Nonetheless, a financial year continues to be the basis for a large number of procedural actions and compliances, including filing returns, making corrections, and other tax-related procedures.

Why Has Tax Year Been Introduced?

We used two distinct terminology prior to the New Income Tax Bill:

Financial Year: This is the year that the income is generated.
Assessment Year: The year in which taxes were filed for the preceding financial year.

Taxpayers, particularly novices, appeared perplexed by these terms. With the new tax structure,

Both FY and AY have been replaced by Tax Year, which simplifies tax filing.
After the Tax Year concludes, you must file your taxes. By doing this, the confusion caused by two distinct years is removed.

Relevant Years under the Current Income Tax Law

The terms "previous year" and "assessment year" are used in the present Income Tax Law.

Previous Year: This is just the year when the money was earned. If the firm is new or the revenue source is new, it may be shorter than a year. In those situations, the prior year runs from the start of the new venture or revenue stream until March 31st.
Assessment Year: The assessment year is the year that taxes are paid on earned income. It is the year that follows the one before it. The income from the prior year is taken into account for tax reasons in the assessment year, and any necessary taxes are paid.

Many taxpayers were confused by this contradictory reference to years. As a result, these ideas were revised, and the "Tax Year" notion was added.

Impact of Tax Year on ITR Filing

The tax filing process is made simpler by doing away with the notions of financial year and assessment year, which provides taxpayers with a clearer picture and less confusion. Additionally, it streamlines the tax authorities' operations by reducing inconsistencies and misunderstandings related to assessment and financial periods. Therefore, the introduction of the notion of tax year does not modify the dates of filing returns or the way of filing. It has made the law easier to understand and more widely available.

Tax Year vs. Previous Year vs. Assessment Year: A Comparison

Aspect	Tax Year (New Law)	Financial Year (Old Law)	Assessment Year (Old Law)
Definition	A 12-month period for earning and reporting income	A 12-month period when income is earned	The year following the Financial Year when tax is calculated
Duration	1st April- 31st March	1st April- 31st March	1st April- 31st March (subsequent year)
Filing Period	After the tax year ends	Income-earning period	ITR is filed in the AY
Example	Tax Year 2026-27 (Income earned from 1st April, 2026, to 31st March, 2027)	FY 2026-27 (Income earned from 1st April, 2026, to 31st March, 2027)	AY 2026-27 (ITR to be filed for FY 2025-26)

Conclusion

Tax filing is now simpler, clearer, and easier to comprehend thanks to the new Tax Year structure. This adjustment is a great step toward making tax compliance easier, regardless of whether you are an investor, business owner, or individual taxpayer. You may now concentrate on earning and filing your taxes using the Tax Year approach without worrying about the distinction between FY and AY.

Frequently Asked Questions

Is ‘Financial Year’ still used in the Indian tax system?

Yes, under certain situations. Due to their legal and procedural significance, several tax procedures, including audits, rectifications, and statutory filings, still make reference to a Financial Year.

Will the Tax Year overlap with the old assessment year?

No. The goal of the new method is to prevent confusion and overlap. For instance, in the previous method, FY 2026-27 revenue was referred to as AY 2026-27. Under the new method, income earned between April 1, 2026, and March 31, 2027, is referred to as Tax Year 2026-27. Therefore, the two systems do not contradict.

What is the distinction between the Tax Year and the Financial Year?

The Previous Year and Assessment Year have been replaced by the new standard period for earning and assessing income, known as the Tax Year. Legal and procedural compliance, including audits and statutory filings, still depends on the Financial Year (FY).

When does the new Tax Year system come into effect?

The Income Tax Bill 2025 states that the Tax Year system will begin on April 1, 2026. As on this day, taxpayers will no longer file their returns using the prior system of the Financial Year and Assessment Year, but rather the Tax Year.

How are Previous Year and Assessment Year referred to in the new Bill?

The phrase "Subsequent Tax Year" has replaced "Assessment Year." Thus, the aforementioned word may be used in the new bill wherever it is necessary to refer to the assessment year. For example, the assessment year is when the tax returns are filed. The phrase "assessment year" has been replaced in the new tax bill with "financial year succeeding to the relevant tax year."

Can a Tax Year be less than 12 months?

Under the following situations, a tax year may be shorter than 12 months:

A new company or occupation is established in the middle of the fiscal year.
A fresh revenue stream established in the midst of the fiscal year.

For instance, if a new company is established on June 1st, 2026, the tax year for that company would run from June 1st, 2026, to March 31st, 2027. Not from April 1st to March 31st.

How are businesses and startups affected by Tax Year?

The first Tax Year for startups and businesses founded during a fiscal year will start on the date of commencement and end on March 31. This removes any ambiguity surrounding partial-year tax assessments.

How are salaried employees affected by Tax Year?

Salaried individuals will continue to file returns based on the Tax Year rather than the previous Financial Year and Assessment Year system.

Will ITR deadlines change under the Tax Year system?

No, the deadline for filing tax returns remains July 31st (unless the government extends it). The new system streamlines the filing process without changing due dates.

Does the new system affect past tax filings?

No, the FY, AY, and PY tax reporting systems will continue to be used for prior years prior to April 1, 2026. The Tax Year will only be used to assess income received after April 1, 2026.

Why was the term ‘Assessment Year’ removed?

Confusion resulted when taxes on income received in the prior Financial Year were filed during the Assessment Year (AY). This is made simpler by the Tax Year, which combines assessment and income earning into a single term.

Is the Tax Year concept applicable in other countries?

In order to match their tax filing dates with a typical 12-month financial year, many nations do, in fact, employ a tax year system. India's tax structure is now more in line with international norms thanks to this modification.