Taxation · Basic Concepts

Tax Year, Previous Year and Exceptions (Income-tax Act, 2025)

Updated 4 October 2026 · Fact-checked

Under the Income-tax Act, 2025, the **tax year** is the twelve months from 1 April to 31 March. You are taxed on income of that tax year, at the year's rates. For a business or source that starts mid-year, its income is counted from the start date to 31 March. A few special cases may be taxed earlier, for the period up to a specified date.

Understand Tax Year, Previous Year and Exceptions

Every tax system needs a period for which income is measured. Under the Income-tax Act, 2025, that period is the tax year. Section 3 defines it as the twelve months starting on 1 April. Tax year 2026-27 means 1 April 2026 to 31 March 2027.

Older books used two separate years: one in which income was earned and a later one in which it was taxed. The 2025 Act uses one concept only. You compute the income of the tax year, and tax it at the rates and rules of that same tax year. For your exam, write "tax year" and nothing else.

The tax year is set by law. It does not depend on the accounting year you keep. A trader may keep books on a calendar-year basis, but for tax the year still starts on 1 April. The rule is the same whether the person is an individual, HUF, firm or company.

There is one exception for a new business or source. If a business or profession is newly set up, or a source of income newly arises, during the tax year, its income is computed for the period from the date of setting up (or the date the source arises) to 31 March. So the period of income for that business or source can be shorter than twelve months. The tax year is not split into separate years for each source. It stays 1 April to 31 March, and income of other sources is computed for the full tax year. From the next tax year, the new business or source also runs for the full twelve months.

A second set of exceptions concerns timing of charge. Normally, income is taxed after the tax year ends. The Act has special provisions under which tax can be charged before the normal timing, because waiting could put the tax at risk. Examples are a person likely to leave India, an AOP or BOI likely to be dissolved, and a person likely to transfer assets to avoid tax. These are examples, not a complete list. Learn each provision case by case, and state the period only as the Act states it for that case. Do not assume it always starts on 1 April, and do not apply one period rule to every case. The common idea is risk to recovery of tax.

Two related provisions are separate. Discontinuance of a business or profession is dealt with in its own provision with its own conditions. A non-resident's shipping business whose ship leaves an Indian port is taxed on a presumptive basis for each voyage. Learn both separately.

Key rules to remember

Tax year: Tax year = twelve months from 1 April (1 April to 31 March); Tax year 2026-27 = 1 April 2026 to 31 March 2027. Set by section 3, not by your books. The exception for a new business or source is below.
Period of income for a new business or source: Period of income for the new business or source = date of setting up (or date source arises) to 31 March; Can be less than 12 months. The tax year itself is not split. Income of other sources is computed for the full tax year. Later years run for the full 12 months.
Charging rule: Income of the tax year is taxed at the rates of the same tax year; Rates come from the Finance Act for that tax year. For May 2027 onwards, use the Finance Act, 2026 and tax year 2026-27.
Exceptions: charge before the normal timing: The Act has special provisions for charge before the normal timing. Examples: person likely to leave India, AOP/BOI likely to be dissolved, person likely to transfer assets to avoid tax. Learn each case separately and state the period only as the Act states it for that case; Theme: risk to tax recovery. The examples are not a complete list. Discontinuance of a business or profession is a separate provision with its own conditions. A non-resident shipping business (ship leaving an Indian port) is taxed on a presumptive basis per voyage, under its own special provision.

How to solve Tax Year, Previous Year and Exceptions questions

Use this method for any question that asks you to identify the tax year, the period of income, or the rate applicable.

1Read the date on which the business, profession or income source started. Note whether the person already had other income sources.
2Write the tax year as 1 April to 31 March. Use the 2025 Act term "tax year" in your answer.
3If the business or source started on or after 1 April of the year, write its period of income as start date to 31 March. If it started before 1 April, it runs for the full twelve months. Income of other sources is computed for the full tax year.
4Ignore the accounting year of the books. Convert the income to the tax year period if the question gives a different period.
5Name the rates and rules: the Finance Act for that tax year applies to the income of that tax year.
6Check whether the facts match a special case of charge before the normal timing. Examples are a person likely to leave India, an AOP or BOI likely to be dissolved, or an asset transfer to avoid tax. These are examples, not a complete list, so apply the provision for the case given and state the period only as the Act states it for that case. Treat discontinuance of a business or profession as a separate provision. Treat a non-resident shipping business as a separate presumptive provision, taxed per voyage.
7State the conclusion in one clear line: the tax year, the period of income for the new business or source, and the income included.

Quickest way: Start date to 31 March, then check for risk

When to use it: Use this for MCQs and for short 2 to 4 mark written parts where the tax year or exception is the only issue.

Find the start date of the business or source. If it is before 1 April of the year in question, the answer is the full 1 April to 31 March.
If it starts mid-year, its income is computed for the period from the start date to 31 March. Eliminate any option that stretches this to a full twelve months or to the next 31 March after that.
Eliminate options that use a calendar year or the books year as the tax year.
If the facts mention leaving India, a body likely to be dissolved, or an asset transfer to avoid tax, pick the exception for charge before the normal timing and state the period only as the Act states it. Do not assume it starts on 1 April. These are examples of special cases, not a complete list. Treat discontinuance and a shipping non-resident as separate provisions.
In written answers, use three lines: Provision (tax year is the twelve months from 1 April; for a new business, income is computed from start date to 31 March), Facts (dates given), Conclusion (the tax year and period of income). This format earns step marks.

Common mistakes in Tax Year, Previous Year and Exceptions

Using the accounting or books year (for example, 1 January to 31 December) as the tax year.
Students link the tax year to the financial statements they study in Accounting.
Fix: Tax year is 1 April to 31 March. For a new business or source in its first year, income is computed from the start date to 31 March. Convert the income to this period if the question gives another period.
Giving a new business a full twelve-month first period, running to the next 31 March.
Students count twelve months from the start date.
Fix: Income of a new business is computed from the start date to the next 31 March after it. The period can be short.
Writing "previous year" and a separate later year in the answer.
Older notes and videos use two different years.
Fix: For May 2027 onwards, use only "tax year". Income of the tax year is taxed at that year's rates.
Thinking a business started mid-year shortens the period for all of the person's income, or creates a separate tax year for that business.
Students apply the new business rule to the whole person instead of only the new source.
Fix: The tax year stays 1 April to 31 March. Only the new business or source is computed from its start date to 31 March. Income of other sources is computed for the full tax year.
Treating the early-charge cases as a general rule, as a complete list, assuming the period always starts on 1 April, or putting the shipping non-resident in the same group.
Students remember the exceptions and forget they apply only to specific risk situations, and they simplify the period.
Fix: The normal rule is that income is taxed after the tax year ends. Apply a special provision only when the facts match it, such as a person likely to leave India, an AOP or BOI likely to be dissolved, or an asset transfer to avoid tax. These are examples, so learn each provision case by case and state the period only as the Act states it. Treat discontinuance of a business or profession as a separate provision. Treat a non-resident shipping business as a separate presumptive provision, taxed per voyage.
Using the previous tax year's rates for current income.
Students carry over the idea that the tax rates come from a different year than the one when income is earned.
Fix: Use the rates of the tax year in which the income arises. For tax year 2026-27, use the Finance Act, 2026.

Worked examples

Example 1

Mr Rohan has been a salaried employee for several years. On 10 August 2026 he starts a consultancy practice and keeps books on a calendar-year basis. State the tax year and the period for which his consultancy income is computed for tax year 2026-27.

Show the solution

Provision: the tax year is the twelve months from 1 April. For a newly set-up business or profession, income is computed for the period from the date of setting up to 31 March.
Facts: Rohan already has salary income, so his salary is computed for the full tax year, 1 April 2026 to 31 March 2027. The consultancy was set up on 10 August 2026.
His calendar-year books are irrelevant for deciding the tax year.
Consultancy income for tax year 2026-27 is computed for the period 10 August 2026 to 31 March 2027.
For tax year 2027-28, consultancy income is computed for the full period 1 April 2027 to 31 March 2028.

Answer: The tax year is 2026-27, 1 April 2026 to 31 March 2027. Salary is computed for the full tax year. Consultancy income is computed for the period 10 August 2026 to 31 March 2027. Both are taxed at the rates for tax year 2026-27.

Example 2

A new company starts manufacturing on 1 October 2026. Its profit from 1 October 2026 to 31 March 2027 is ₹6,00,000. Its profit for 1 April 2027 to 31 March 2028 is ₹10,00,000. State the tax years and the income for each.

Show the solution

Provision: the tax year is the twelve months from 1 April. For a newly set-up business, income is computed for the period from the date of setting up to 31 March.
Tax year 2026-27 is 1 April 2026 to 31 March 2027. The business was set up on 1 October 2026, so its income for this tax year is computed for the six-month period 1 October 2026 to 31 March 2027.
Income for tax year 2026-27 is ₹6,00,000, taxed at the rates for tax year 2026-27.
Tax year 2027-28 is 1 April 2027 to 31 March 2028. The business runs for the full twelve months.
Income for tax year 2027-28 is ₹10,00,000, taxed at the rates for tax year 2027-28.

Answer: For tax year 2026-27 (1 April 2026 to 31 March 2027), income is computed for the period 1 October 2026 to 31 March 2027 and is ₹6,00,000. For tax year 2027-28 (1 April 2027 to 31 March 2028), income is for the full year and is ₹10,00,000.

Exam tips

Always write "tax year" in answers. Do not use the older two-year terms, because the syllabus from May 2027 is based on the Income-tax Act, 2025.
In MCQs on a new business, find the start date first. Then pick the option that ends on the next 31 March.
Questions often give the books year to confuse you. State clearly that the books year does not decide the tax year, which is the twelve months from 1 April.
Learn the early-charge cases as examples of special provisions, not a complete list: person likely to leave India, AOP or BOI likely to be dissolved, and asset transfer to avoid tax. Study each provision case by case. Remember that discontinuance of business is a separate provision, and a shipping non-resident is taxed on a presumptive basis per voyage. State the period only as the Act states it for the case. A one-line fact match is usually enough to earn the marks.
This topic is short, so it is often combined with residential status or rates. Fix the tax year first, because residence tests are applied to that year.

Practice questions from Basic Concepts

Tax Year, Previous Year and Exceptions 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 Exceptions: frequently asked questions

What is the difference between tax year and the older two-year concept?

The older approach used one year for earning income and a later year for taxing it. The Income-tax Act, 2025 uses a single tax year, 1 April to 31 March, for both. For May 2027 onwards, answer using the tax year only.

How do I find the period of income for a new business?

The tax year is the twelve months from 1 April. For a newly set-up business, income is computed for the period from the date of setting up to the next 31 March. After that, the business runs for the full twelve months of each tax year.

Can income be computed for less than twelve months in a tax year?

Yes, but only for a newly set-up business or profession, or a newly arising source of income, in its first year. Its income is computed from the date of setting up or the date the source arises to 31 March. The tax year itself stays 1 April to 31 March, and income of other sources is computed for the full tax year.

Which cases may be charged early instead of after the tax year ends?

The Act has special provisions for charge before the normal timing, where waiting could endanger tax recovery. Examples are a person likely to leave India, an AOP or BOI likely to be dissolved, and a person likely to transfer assets to avoid tax. These are not a complete list, so learn each provision case by case and state the period only as the Act states it. Discontinuance of a business or profession is a separate provision with its own conditions. A non-resident shipping business whose ship leaves an Indian port is taxed on a presumptive basis per voyage under its own special provision.