Direct Tax Laws & International Taxation · Basic Concepts

Tax Year, Previous Year and Assessment Concepts

Updated 5 October 2026 · Fact-checked

Under the Income-tax Act, 2025, the tax year is normally the twelve months from 1 April to 31 March. You earn income and are taxed on it in the same tax year, so the old previous year and assessment year pair is gone. For a newly set up business or profession, or a newly arisen source, the tax year is the shorter period from set-up or coming into existence to the next 31 March.

Understand Tax Year, Previous Year and Assessment Concepts

Every tax law needs a time window. Income has to be measured over a fixed period, and the tax rates of one particular year have to be applied to it. The tax year is that window.

Under the earlier law, you had two terms. The previous year was the year in which income was earned. The assessment year was the following year in which that income was assessed and taxed. Rates were those of the assessment year. This two-step idea confused many students.

The Income-tax Act, 2025 (in force from 1 April 2026) uses one term: tax year. Under section 3, it is normally the twelve months beginning on 1 April. Tax year 2026-27 runs from 1 April 2026 to 31 March 2027. Income earned in it is computed, charged and taxed for that same tax year. There is no assessment year. Rates come from the Finance Act applicable to that tax year.

There is one exception to the twelve-month length. If a business or profession is newly set up, or a source of income newly comes into existence, during the year, the tax year is the period from the date of setting up or coming into existence to the following 31 March. So a tax year can be shorter than twelve months, but it never crosses a 31 March. Do not give a house property or a capital asset acquired during the year a separate tax year of its own. Its income is computed within the tax year of the person.

A person may choose any accounting year for books, such as a calendar year. The law does not follow that choice. You must still split the income to fit the tax year ending 31 March. Also, income of earlier years (up to 2025-26) is still dealt with under the old Act and its old terms, which is why you must know both sets of terms for the transition.

Key rules to remember

Tax year (normal rule): Tax year = 12 months from 1 April to 31 March; Tax year 2026-27 = 1 April 2026 to 31 March 2027. Income earned in it is taxed for that same tax year. This is the normal rule.
Tax year for new business or profession: Tax year = date of setting up of business or profession → next 31 March; Counted from the date of setting up, not the date of incorporation or first sale. The tax year for that business is shorter than twelve months.
Tax year for new source of income: Tax year = date source comes into existence → next 31 March; Applies where a source of income newly comes into existence during the year. Acquiring a house property or a capital asset does not by itself start a separate tax year. Its income is computed within the tax year.
Old terms mapped to the new term: Previous year + Assessment year (old Act) → Tax year (2025 Act); Use only 'tax year' in answers on the 2025 Act. Never write 'assessment year' for tax year 2026-27 or later.
Rates applicable: Income of tax year X is taxed at the rates of the Finance Act for tax year X; No lag. Rates do not come from the next year.

How to solve Tax Year, Previous Year and Assessment Concepts questions

Use this method for any question that asks you to identify the tax year or the period of income, or to explain the concept or the difference from the old law.

1Read the facts and list each source or business separately, with the date each one started.
2Ask: did it exist before 1 April of the year? If yes, its tax year is the full 1 April to 31 March.
3If it is new, find the correct start date. For a business, use the date of setting up (readiness to commence), not incorporation or first sale. For other sources, use the date it came into existence.
4Fix the end date as the next 31 March. Count the months or days if the question asks for the length of the period.
5State the tax year in the form 2026-27, give the exact period for the new business or source, and mention that income is taxed in that same tax year.
6If the question is theory, add the old-law comparison: previous year, assessment year, and the move to one term.
7Close with a one-line conclusion naming the exact period.

Quickest way: Start date to 31 March

When to use it: For MCQs and short case questions asking for the tax year or period of income of a newly started business or source within the year.

Check whether the source is old or new. Old means a full year from 1 April.
For new ones, take the start date and run it to the next 31 March.
Do not use accounting year, incorporation date or first sale date unless the facts show that is when the business was set up.
Write the answer as 'tax year for the new business or source is start date to 31 March 20XX (tax year 20XX-XX)'.

Common mistakes in Tax Year, Previous Year and Assessment Concepts

Writing 'assessment year 2027-28' for income of 2026-27 under the 2025 Act.
Habit from the old Act, where income of one year was assessed in the next.
Fix: Use only 'tax year 2026-27'. Mention previous and assessment year only when a question asks you to compare the two laws or deals with income up to 2025-26.
Starting a new business's period of income from incorporation of the company.
Students link the business start with the company's birth.
Fix: The period starts from the date of setting up of the business. Incorporation may be earlier. Read the facts for when the business was ready to commence.
Using the date of first sale or first receipt as the start date.
Confusing 'set up' with 'commenced' or 'earned income'.
Fix: Set up means the business is ready to commence. First sale can be later and does not change the start date.
Running a new source's tax year for twelve months from its start date.
Assuming every period is twelve months from the starting point.
Fix: The period always ends on 31 March. If a business is set up on 1 Dec 2026, its tax year runs to 31 Mar 2027, which is four months.
Applying the next year's rates to the current tax year's income.
Carry-over of the assessment year logic.
Fix: Under the 2025 Act the tax year's own rates apply to income of that tax year.

Worked examples

Example 1

Rohan, a salaried person, has let out a flat since 2022. On 10 August 2026 he sets up a consultancy practice. Identify the tax year for each source for tax year 2026-27.

Show the solution

List the sources: salary, house property (existing) and the consultancy (new).
Salary and house property existed before 1 April 2026, so their tax year is the full 1 April 2026 to 31 March 2027.
The consultancy was newly set up on 10 August 2026, so its tax year is the shorter period starting on that date.
That period ends on 31 March 2027, the next 31 March.
Income of each source is taxed for its own tax year within 2026-27, and no assessment year is involved.

Answer: Salary and house property income fall in the full tax year 1 April 2026 to 31 March 2027. The consultancy's tax year is 10 August 2026 to 31 March 2027. No assessment year applies.

Example 2

Zeta Pvt Ltd was incorporated on 15 November 2026. Its factory was ready for production on 1 December 2026, and trial production began on 1 February 2027. On 1 January 2027, it acquired a building and let it out. Determine the tax year of the company for its first year.

Show the solution

Incorporation on 15 November 2026 does not by itself start the tax year for business income.
The business is set up when the factory is ready to commence, which is 1 December 2026, not the later date of trial production.
The first tax year of the newly set up business runs from 1 December 2026 to the next 31 March, which is 31 March 2027. That is four months.
The building acquired on 1 January 2027 does not start a separate tax year. Its rental income, earned from 1 January 2027, is computed within the same tax year.
The period ends on 31 March 2027 and falls in tax year 2026-27. No assessment year is involved.

Answer: Zeta's first tax year is 1 December 2026 to 31 March 2027 (four months), within tax year 2026-27. The rental income from 1 January 2027 is computed within this same tax year. No separate tax year arises for the house property.

Exam tips

In case MCQs, spot the start date first. Distractors usually use incorporation date, first sale date or the accounting year.
Always write 'tax year', not 'assessment year', in answers on the 2025 Act. Mention the old terms only to compare.
For comparison questions, use a short pairing: old law had two years and a lag; new law has one tax year and no lag.
Show the dates and the number of months in your working. Even a one-line working earns method marks.
If facts mention books closed on 31 December or 30 June, say the books are irrelevant for choosing the tax year and split the income to the 31 March year.

Practice questions from Basic Concepts

Tax Year, Previous Year and Assessment Concepts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Tax Year, Previous Year and Assessment Concepts: frequently asked questions

What is the difference between previous year and tax year?

The previous year was the year in which income was earned under the old law, and tax was levied in the following assessment year. The tax year under the 2025 Act is normally the twelve-month period from 1 April to 31 March, and income of that period is taxed for the same tax year.

How is income of a newly set up business placed in the tax year?

For a newly set up business, the tax year is the shorter period from the date of setting up to the next 31 March. For example, for a business set up on 1 December 2026, the tax year is 1 December 2026 to 31 March 2027, within tax year 2026-27.

Does assessment year still exist?

For tax year 2026-27 and later under the Income-tax Act, 2025, there is no assessment year. It remains relevant only for income up to 2025-26, which is dealt with under the earlier Act.

Can a company use a calendar-year accounting period for tax?

It can keep books on any accounting period the law allows, but income is taxed for the tax year from 1 April to 31 March. You have to compute income according to that period.