Article Updated Date : 20-02-2025

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The Concept of “Tax Year” introduced by Income Tax Bill 2025

The Concept of “Tax Year” introduced by Income Tax Bill 2025 vis a vis Previous Year (PY), Assessment Year (AY), Calendar Year and Financial Year (FY).

The Income Tax Bill 2025 was introduced in Parliament on February 13, 2025. One of the key changes in this bill is the introduction of the concept of “Tax Year”, which replaces both the Previous Year (PY) and Assessment Year (AY). This change is aimed at making tax compliance simpler for taxpayers and removing the confusion between Previous Year (PY) and Assessment Year (AY) amongst the taxpayers.

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Before the introduction of the concept of Tax Year by Income Tax Bill 2025, there was a concept of Previous Year (PY) and Assessment Year (AY) under Income Tax as per Income Tax Act 1961.

The New Income Tax Act i.e. Income Tax Act 2025 after enactment by Parliament, shall come into effect from April 2025 and it shall replace the approximately six-decade old Income Tax Act 1961.

The Concept of Financial Year, Previous Year, Calendar Year and Assessment Year: -
1. Financial Year (FY) it is commonly used in accounting and business contexts: 
  - Definition: The 12-month period in which income is earned.  
  - Period: April 1st to March 31st of the following year.  
  - Example: FY 2023-24 (April 1, 2023 – March 31, 2024).  

2. Previous Year (PY)  
  - Definition: The same as the Financial Year in which income is earned.  
  - Example: For FY 2023-24, the PY is also 2023-24.  

3. Assessment Year (AY)  
  - Definition: The year following the Financial Year in which income is assessed and taxed.  
  - Example: For FY 2023-24, the AY is 2024-25.

4. Calendar Year (CY)  
  - Definition: The 12-month period from January 1st to December 31st.  
  - Example: Calendar Year 2024 (January 1, 2024 – December 31, 2024).  

Key Relationship amongst the Financial Year, Previous Year and Assessment Year:  
- Income is earned in the Financial Year (FY) = Previous Year (PY).  
- Income is assessed and taxed in the Assessment Year (AY).  

What is a Tax Year?
A Tax Year is the new term replacing both the Previous Year (PY) and Assessment Year (AY) in India's tax system. It is a 12-month period that begins on April 1st and ends on March 31st of the following year.

But here’s where it gets interesting:

If you start a new business in the middle of a financial year, your Tax Year begins from the date your business starts and ends on March 31st.
If you earn income from a new source (like a new investment or rental property etc), the Tax Year for that income starts from the date the income begins.
This means you now track your income within one straightforward period—no more confusion between FY and AY!

Tax Year in Income Tax:

The Tax Year replaces both FY and AY, making tax filing easier. You file taxes after the Tax Year ends, without needing to refer to two different years.
It aligns with global tax practices, making compliance simpler.

Why Was the Term ‘Financial Year’ Not Used in place of ‘Tax Year’?
The term "Financial Year" is not used in place of "Tax Year" due to the following reasons:  

1. International Standardization  
  - "Tax Year" is used globally in tax laws, while "Financial Year" varies based on accounting practices.  
  - Different countries have different financial year definitions, but they define a tax year based on their tax assessment periods.  

2. Taxation vs. Accounting Perspective  
  - The Financial Year is used in businesses for accounting and financial reporting purposes.  
  - The Tax Year is used specifically for taxing the incomes under  income tax.  

3. Legal and Legislative Use  
  - Indian tax laws use "Tax Year" (Previously "Previous Year (PY) and Assessment Year (AY)) instead of "Financial Year" to define tax computation and filing requirements.  
  - "Tax Year" ensures clarity in taxation matters without confusion with financial reporting.  

Conclusion:  
While "Financial Year" and "Tax Year" often refer to the same period, "Tax Year" is used for legal and tax compliance clarity.  

Will This Affect My Tax Filing?
Yes, but in a positive way! Here’s how: No more mix-ups between FY and AY. You now only need to remember one term—Tax Year. Tax deadlines remain the same. The last date for filing your income tax return (ITR) will still be July 31st (unless extended by the government). Businesses get clarity. Companies and professionals can better track their tax obligations without dealing with two different financial references.
What This Means for You?
The new Tax Year system makes tax filing more straightforward, transparent, and easy to understand. Whether you’re an individual taxpayer, business owner, or investor, this change is a welcome step towards simplifying tax compliance. Now, you don’t need to worry about FY and AY confusion anymore—just focus on earning and filing your taxes under the Tax Year system!

Frequently Asked Question Answered
1. Is ‘Financial Year’ Still Used in the Tax System?
Yes, in some cases! Certain tax procedures—like audits, rectifications, and statutory filings—still refer to a Financial Year because of their legal and procedural importance.

2. Will the Tax Year Overlap with the Old Assessment Year?
No. The new system is designed to avoid overlap and confusion. 
For example:
AY 2026-27 under the old system refers to income from FY 2025-26. Tax Year 2026-27 under the new system refers to income from April 1, 2026 – March 31, 2027.
So, there’s no conflict between the two systems.

3. What is the main difference between the Tax Year and the Financial Year?
The Tax Year is the new standard period for earning and assessing income, replacing the Previous Year and Assessment Year. The Financial Year (FY) continues to be relevant for legal and procedural compliance, such as audits and statutory filings.

4. When does the new Tax Year system come into effect?
The Tax Year system starts from April 1, 2026, as per the Income Tax Bill 2025. From this date, taxpayers will file their returns based on the Tax Year rather than the previous Financial Year and Assessment Year system.

5. How does the Tax Year impact businesses and startups?
For businesses and startups established during a financial year, their first Tax Year will begin from the date of commencement and end on March 31. This eliminates confusion regarding partial-year tax assessments.

6. Will tax return deadlines change under the new Tax Year system?
No, the tax return filing deadline remains July 31st (unless extended by the government). The new system simplifies the filing process without altering due dates.

7. Does the new system affect past tax filings?
No, tax filings for previous years before April 1, 2026, will still follow the old system (FY, AY, and PY). Only income earned from April 1, 2026, onwards will be assessed under the Tax Year.

8. Why was the term ‘Assessment Year’ removed?
The Assessment Year (AY) was used for filing taxes for the income earned in the previous Financial Year, which caused confusion. The Tax Year simplifies this by combining both income earning and assessment into a single term.

9. Is the Tax Year concept used in other countries?
Yes, many countries use a Tax Year system, aligning their tax filing periods with a standard 12-month financial period. This change in India makes the tax system more comparable to global standards.

10. How does the new Tax Year affect salaried employees?
For salaried individuals, nothing changes in terms of income tax deductions (TDS) and filing procedures—they will now file returns based on the Tax Year instead of the previous Financial Year and Assessment Year system.

Disclaimer:

Article is for educational Purpose

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