Tax Year Concept in New Income Tax Act 2025 Explained

Tax Year Concept in New Income Tax Act 2025

Meaning of Tax Year

A tax year is a period of twelve months within a financial year, commencing on the 1st of April. It replaces the term ‘previous year’ as used in the Income-tax Act, 1961. The term “assessment year” has also been discontinued, and “tax year” is now used in relation to income tax rates and assessment of income.

• Relevant Clause: Clause 3 of the Income-tax Bill, 2025 defines a “tax year” as the twelve-month period of the financial year commencing on the 1st of April. In cases where a business or profession is newly set up, or a new source of income comes into existence during a financial year, the tax year begins on the date of the setup or when the income source begins and ends at the end of that financial year.
  • Clause 3(1): “For the purposes of this Act, ‘tax year’ means the twelve months period of the financial year commencing on the 1st April”.
  • Clause 3(2): “In the case of a business or profession newly set up, or a source of income newly coming into existence in any financial year, the tax year shall be the period beginning with— (a) the date of setting up of such business or profession; or (b) the date on which such source of income newly comes into existence, and, ending with the said financial year”.
• Example: If a business is established on September 15th, 2026, the tax year for that business will begin on September 15th, 2026, and end on March 31st, 2027. If an individual starts earning income from a new source on December 1st, 2026, the tax year for that income will begin on December 1st, 2026, and end on March 31st, 2027. For a business that has been in operation for many years, a tax year would be April 1 to March 31 of that year.
• Key Aspects:
  • The tax year replaces the concept of the previous year.
  • The tax year is generally aligned with the financial year, but can be shorter.
  • The tax year is the period for which income tax is calculated.
  • The term “financial year” is still used for procedural matters, like filing returns.
  • The tax year is used for income tax assessment as well as income tax rates.
  • The concept of tax year is similar to that in comparable international jurisdictions.

In summary, the tax year is the main unit of time for taxation, replacing the previous year and assessment year, and is generally a 12-month period from April 1st to March 31st, but can be shorter in certain cases.

key aspects of Tax Year

Here’s a breakdown of key aspects of the tax year:

• Replaces Previous Year: The concept of a tax year replaces the ‘previous year’ used in the Income-tax Act of 1961. The ‘previous year’ and ‘assessment year’ had been used because taxpayers could have different twelve-month periods for each income source. However, since 1989, the previous year has been aligned to the financial year.
• Relation to Financial Year: A tax year is a twelve-month period contained within a financial year. A financial year, as defined in the General Clauses Act, 1897, starts on April 1st.
• Shorter than a Financial Year: A tax year can be less than a financial year if a business is newly set up or a source of income comes into existence during the financial year. In such cases, the tax year begins from the date of setup or when the income source comes into existence and ends on the last day of that financial year.
• Used for Income Tax: Income tax is charged for a tax year, and the total income is also calculated for a tax year. The rate of income tax also pertains to the tax year.
• No Conflict with Assessment Year: The tax year will not conflict with the assessment year of the Income-tax Act, 1961. For example, assessment year 2026-27 under the old act will pertain to income from the previous year 2025-26, while tax year 2026-27 will pertain to the income of the financial year 2026-27.
• Common Terminology: The term ‘tax year’ is commonly used in income-tax legislation in comparable tax jurisdictions.
• Procedural Matters: While “tax year” is used for taxation, the term “financial year” is used for procedural actions and compliances, such as time periods for filing returns and rectifications.

In summary, the tax year is the period for which income is taxed. It is typically a full financial year but can be shorter when income sources begin mid-year.

Why Tax Year Concept is significant

The concept of a “tax year” is primarily defined and used in the Income-tax Bill, 2025, to replace the terms “previous year” and “assessment year” that were used in the Income-tax Act, 1961. While the Finance Bill 2025 proposes amendments to the Income Tax Act, 1961, the concept of the tax year is introduced in the new Income-tax Bill, 2025. The Income Tax Bill 2025 incorporates all amendments proposed in the Finance Bill 2025.

Here are some of the relevant clauses where the concept of “tax year” is used in the Income-tax Bill 2025, along with their titles:

• Clause 3: Definition of “tax year”
  • 3(1): “For the purposes of this Act, “tax year” means the twelve months period of the financial year commencing on the 1st April”.
    • This clause defines a tax year as the twelve-month period of the financial year beginning on April 1st.
  • 3(2): “In the case of a business or profession newly set up, or a source of income newly coming into existence in any financial year, the tax year shall be the period beginning with— (a) the date of setting up of such business or profession; or (b) the date on which such source of income newly comes into existence, and, ending with the said financial year”.
    • This clause specifies that if a new business is established or a new source of income begins during a financial year, the tax year begins from the date of establishment or when the new source of income begins and ends at the end of that financial year.
• Clause 11: Incomes not included in total income
  • Clause 11 states that certain incomes detailed in Schedules II, III, IV, V, and VI are not included when computing total income for a tax year and also lists persons in Schedule VII who are not subject to tax.
• Clause 19: Deductions in respect of salary income
  • Clause 19 provides for deductions against salary income, and provides for a formula to calculate the deduction.
• Clause 4: Charge of income-tax
  • This clause provides for the charge of income tax, and uses the term ‘tax year’ in place of previous year.
• Clause 5: Scope of total income
  • This clause defines the scope of total income for both residents and non-residents, and makes reference to a tax year.
• Clause 20: Income from house property
  • This clause addresses the charge of income tax on the annual value of property, which includes buildings and land and uses tax year to define the period for such assessment.
• Clause 67: Capital gains
  • This clause describes the chargeability of income tax under the head “Capital gains” for various kinds of transfers of capital assets, using the term tax year.
• Clause 92: Income from other sources
  • This clause provides a list of the incomes which are chargeable to tax under the head “Income from other sources”, using the term tax year.
• Clause 195: Tax on certain incomes
  • This clause stipulates the tax on certain incomes that are referred to in clauses 102 to 106, and makes reference to the tax year.
• Clause 263: Obligation to file return of income
  • This clause states the requirement for persons to file their return of income and stipulates the timelines for doing so, referencing the tax year.
• Clause 403: Payment of advance tax
  • This clause deals with the payment of advance tax, referencing the tax year as the period for which tax is being calculated.
• Clause 405: Method of computing advance tax
  • This clause outlines the methods for calculating the advance tax payable in a tax year.

These are some of the main clauses where the concept of the tax year is used within the Income-tax Bill, 2025. The Bill uses the concept of the tax year throughout its provisions for assessing income, calculating tax liabilities, and for compliance requirements. The concept of the tax year is a significant change from the old Income Tax Act, 1961, where the “previous year” and “assessment year” were used, and it is intended to simplify the tax system by aligning the assessment period with the financial year.

Relevance of financial Year in New Income Tax Bill 2025

The term ‘financial year’ is not defined within the Income-tax Bill, 2025. It is also not defined in the Income-tax Act, 1961. However, the term is defined in section 3(21) of the General Clauses Act, 1897, as the year commencing on 1st April.

Despite not being defined in the Income-tax Bill, 2025, the term ‘financial year’ remains relevant and is used throughout the bill for procedural and compliance purposes. While the ‘tax year’ is the unit period of taxation, the ‘financial year’ is used to set timelines for compliance and other procedural matters.

Here’s a breakdown of how the ‘financial year’ is relevant, with examples:

• Timelines for Compliance: Many actions carried out by tax authorities and other stakeholders, like the time period for filing returns and rectifications, require reference to a financial year.
• Procedural Issues: The ‘financial year’ is used for various procedural matters.
  • For example, the proposed section 21(5) of the Bill refers to a financial year in relation to the completion certificate issued by a competent authority in case of a building held as stock-in-trade. In this case, the term ‘financial year’ has more relevance than the term ‘tax year’.
• Tax Year Definition: A ‘tax year’ is defined as a twelve-month period within a financial year, starting on April 1st. If a business is newly set up or a new source of income arises during a financial year, the tax year begins from that date and ends on the last day of the same financial year.

Relationship between ‘Tax Year’ and ‘Financial Year’

• The ‘tax year’ is the unit period for taxation, while the ‘financial year’ is used for setting the timelines for compliance and procedural issues.
• The ‘tax year’ generally aligns with the ‘financial year’, but in specific cases where a business starts mid-year, it can be less than the full ‘financial year’.
• The introduction of ‘tax year’ aims to simplify the tax system by replacing the terms “previous year” and “assessment year” and aligning the assessment period with the financial year.
  • The terms ‘previous year’ and ‘assessment year’ were creating confusion for taxpayers as they represented two different financial years.

Examples

• Return Filing: The due dates for filing returns of income are based on the financial year. Though the income is calculated for the ‘tax year’, the timeline for filing the return is referenced by the ‘financial year’.
• Advance Tax: The calculation of advance tax payable in a tax year is in reference to the financial year. The timelines for payment of advance tax instalments are also linked to the financial year.
• New Business: If a business is established on November 15th of a given financial year, the tax year for that business will start on November 15th and end on March 31st of the same financial year. The timelines for compliance and procedural matters would still be referenced by the full financial year, beginning April 1st.

In summary, while the ‘tax year’ is the period for which income is calculated and taxed, the ‘financial year’ provides a reference for the administrative and procedural deadlines. The ‘financial year’ is used throughout the Income-tax Bill, 2025 despite not being explicitly defined within it.

Relevant Clauses in Income Tax Bill 2025 where concept of Financial Year is used

The concept of a ‘financial year’ is not explicitly defined within the Income-tax Bill, 2025, nor was it defined in the Income-tax Act, 1961. The term ‘financial year’ is defined in section 3(21) of the General Clauses Act, 1897, as the year commencing on 1st April. Although not defined in the Income-tax Bill, 2025, the term ‘financial year’ is still relevant and is used for setting timelines for compliance and other procedural matters.

While the concept of ‘tax year’ is central to the Income-tax Bill 2025, replacing the ‘previous year’ and ‘assessment year’, the ‘financial year’ continues to be used for various procedural aspects within the bill.

The Income-tax Bill, 2025 incorporates all amendments proposed in the Finance Bill 2025. The Finance Bill 2025 itself does not use the term ‘tax year’, but the Income-tax Bill 2025, which includes the amendments from the Finance Bill 2025, uses the term financial year in the context of compliance timelines and procedural matters.

Here are some instances where the ‘financial year’ is used within the Income-tax Bill, 2025, along with the titles of the clauses:

• Clause 3: Definition of “tax year”
  • 3(1): This clause defines “tax year” as the twelve-month period of the financial year commencing on the 1st of April. This establishes the direct link between the ‘tax year’ and the ‘financial year’.
  • 3(2): This clause states that in the case of a newly set up business or a new source of income, the tax year begins from the date of setup/source and ends with the end of that financial year.
• Clause 21: Determination of annual value
  • Clause 21(5) refers to a financial year in relation to the completion certificate issued by a competent authority for a building held as stock-in-trade. This demonstrates the relevance of the term ‘financial year’ for procedural aspects.
• Clause 11: Incomes not included in total income
  • This clause states that certain incomes detailed in Schedules II, III, IV, V, and VI are not included when computing total income for a tax year. The schedules themselves may make reference to a financial year. Schedule III includes a provision that income from a specified fund is not included in total income for a tax year, where the period referred to in sub-clause (i) ends before the 1st April, 2033. The period referred to is tied to the end of a financial year.
• Clause 263: Obligation to file return of income
  • This clause outlines the obligation to file a return of income, and the timelines for such filing, which are connected to the end of the financial year.
• Clause 403: Payment of advance tax
  • This clause deals with the payment of advance tax, referencing the financial year as the period for which the tax is being calculated.
• Clause 405: Method of computing advance tax
  • This clause outlines the methods for calculating the advance tax payable in a tax year, using the rate or rates specified in the Finance Act of the relevant tax year. This implies that the Finance Act provides rates in reference to the tax year, which is tied to the financial year.
• Clause 536: Repeal and savings
  • This clause addresses the repeal of the Income-tax Act, 1961 and includes provisions regarding the saving of actions taken under that Act, where some actions may be tied to the financial year.

These examples illustrate how the term ‘financial year’ is used in the Income-tax Bill, 2025, primarily for procedural and compliance-related aspects, even though the core concept of taxation is now based on the ‘tax year’. The timelines and various procedural matters are tied to the ‘financial year’.

Refer

• New Income Tax Act 2025: update 

• Key differences between the Income Tax Act 1961 and Income Tax Bill 2025
• Income Tax Bill 2025 : Govt released Section-wise comparison table and FAQs on 13.02.2025
• Income Tax Website

Hope the above article has answered the following questions

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