What is a Tax Year?
The term ‘tax year’ refers to a 12-month period within a financial year and replaces the term ‘previous year’ used in the Income-tax Act, 1961. With the removal of ‘assessment year’ in the Income-tax Bill, the ‘tax year’ will now also determine the applicable income tax rates and be used for assessing income or total income.
Previously, the use of ‘previous year’ and ‘assessment year’ caused confusion as they referred to different financial years. The tax year will start on April 1st and end on March 31st of the following year.
Here’s what’s new:
- If you start a business mid-year, your Tax Year begins from your business's start date and ends on March 31st.
- If you earn income from a new source (such as investments or rental property), the Tax Year for that income starts from the date you begin earning.
Since a tax year can sometimes be shorter than a financial year, the term ‘financial year’ has not replaced ‘previous year’ and ‘assessment year’ entirely. However, many procedural actions and compliances—such as filing returns, making rectifications, and other tax-related processes—are still based on a financial year.
In such cases, the financial year remains relevant and will continue to be used separately where necessary.
Current Income Tax Law: Which Years are Relevant?
In the current Income Tax Law, the terms Previous Year and Assessment Year are used:
- Previous Year: This is the year in which income is earned. If a business is newly set up or a new income source is introduced, the previous year starts from the date of commencement and ends on March 31st.
- Assessment Year: This is the year following the previous year, in which the earned income is assessed for tax, and taxes are paid if applicable.
Since this dual-year system often caused confusion among taxpayers, the concept of “Tax Year” was introduced to simplify tax compliance.
Why was the Tax Year Introduced?
Before the New Income Tax Bill, we used two different terms -
- Financial Year: The year in which the income is earned.
- Assessment Year: The year in which taxes were filed for the previous financial year.
These terms seemed confusing for taxpayers, especially for beginners.
Under the New tax system -
- Tax Year has replaced both FY and AY, making tax filing easier.
- You have to file taxes after the Tax Year ends. This eliminates the confusion associated with two different years.
How Do We Refer to the Previous Year and Assessment Year in the new Bill?
The term ‘Assessment Year’ has been changed to ‘Subsequent Tax Year.’ Therefore, wherever there is a need for reference to the assessment year in the new bill, the above term can be used. For instance, the tax returns are filed in the assessment year. In the new tax bill, instead of using the term assessment year, it is referred to as ‘Financial year succeeding to the relevant tax year. ’
Can a Tax Year be Less Than 12 Months?
Yes, a tax year can be less than 12 months. Below are the situations in which a tax year can be less than a year -
- A new business or profession is started in the middle of the Financial Year.
- A new source of income has been set up in the middle of the Financial Year.
What is the Difference Between Tax Year, Financial Year and Assessment Year?
The comparison of tax year under the new Income Tax Bill, 2025 and Financial year and Assessment year is as follows:
| Aspect |
Tax Year (New Law) |
Financial Year (Old Law) |
Assessment Year (Old Law) |
| Definition |
12-month period for earning and reporting income |
12-month period when income is earned |
The year following the Financial Year when tax is computed |
| Duration |
April 1 – March 31 |
April 1 – March 31 |
April 1 – March 31 (subsequent year) |
| Filing Period |
Tax is filed after the tax year ends |
Used to refer to income-earning period |
A tax return is filed in the AY |
| Example |
Tax Year 2026-27 (Income earned from April 1, 2026, to March 31, 2027). |
FY 2026-27 (Income earned from April 1, 2026, to March 31, 2027 |
AY 2026-27 (Tax return to be filed for FY 2025-26) |
How Will This Change Impact My Tax Filing?
- The removal of the concept of financial year and assessment year simplifies the tax process, which gives taxpayers a better overview and lesser confusion.
- It simplifies the operations of the tax authorities additionally by minimizing the disparities and misinterpretations concerned with assessment periods and financial periods.
- Therefore, the introduction of the concept of tax year does not change the dates of filing return or the manner of filing. It has simplified the law and made it more accessible to the public at large.
Need help filing your ITR or have a tax-related query? Get in touch with our tax experts, who can provide end-to-end tax solutions for your needs. Book an Online CA now!
