Direct and Indirect Taxation · Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Basic Concepts and Definitions under Income-tax Act 2025

Updated 10 October 2026 · Fact-checked

Under the Income-tax Act, 2025, income is taxed in the tax year in which it is earned, normally 1 April to 31 March. The old previous year and assessment year split is gone. A person is any entity the Act lists, and an assessee is a person liable to tax or tax proceedings. Tax is charged on total income at the applicable rates.

Understand Basic Concepts and Definitions under Income-tax Act 2025

Start with the idea of the tax year. The Income-tax Act, 2025 applies from 1 April 2026. It taxes income of a period in that same period. That period is the tax year, which is the twelve months beginning on 1 April. Tax year 2026-27 runs from 1 April 2026 to 31 March 2027.

The old Income-tax Act, 1961 worked in two steps. Income was earned in the previous year and taxed in the next year, called the assessment year. The 2025 Act removes this two-year idea. Do not use the terms previous year or assessment year when you answer for the 2025 Act. You may mention them only to explain the change, or when a question is about income of years before 1 April 2026.

There is one special case. If a business or profession is newly set up, or a new source of income comes into existence, during the year, the tax year for that source starts on the date of setting up or arising. It ends on the following 31 March. So the first tax year for such a source can be shorter than twelve months. This rule only shortens the first tax year for that new source. It does not give the person a second or separate tax year. The person's other income stays in the normal tax year, 1 April to 31 March.

Next, the person. The Act taxes persons, and the definition of person is inclusive, so the list is wide and not exhaustive. It covers an individual, a Hindu undivided family (HUF), a company, a firm, an association of persons or body of individuals (whether incorporated or not), a local authority, and every other artificial juridical person not falling in the earlier categories. A person is an assessee when tax or any other sum is payable by that person under the Act, when proceedings are going on against that person, when that person is entitled to a refund, or when that person has a loss assessed. This is a summary of the definition. An assessee also includes a deemed assessee and an assessee in default, which the Act treats as assessees in the cases it names. A person with no tax payable, no refund, no loss assessed and no proceedings is not an assessee. So every assessee is a person, but not every person is an assessee.

Finally, income is defined inclusively. It is wider than regular receipts. It includes profits and gains, dividends, voluntary contributions received by certain trusts, and other items the Act names. Some receipts are capital, and some are exempt. Total income is what is left after the Act's rules on heads of income, set off and deductions. Tax is charged on total income at the rates fixed for the person. Individuals have slab rates under the default regime, and companies and other persons have their own rates. In exam questions, the slab rates are normally given or assumed in the question, so use the rates the question states.

Key rules to remember

Tax year: Tax year = 1 April to 31 March (12 months); Income is taxed in the tax year in which it is earned. The terms previous year and assessment year do not apply under the 2025 Act.
Newly set up source: First tax year for that source = date of setting up or arising to the next 31 March; Applies to a new business, profession or new source of income. It only shortens the first tax year for that source and can be shorter than 12 months. The person's other income stays in the normal tax year.
Person: Person includes individual, HUF, company, firm, AOP/BOI, local authority, other artificial juridical person; The definition is inclusive, so the list is not exhaustive. Learn the list as it is. Examination questions often ask whether an entity is a person.
Assessee: Assessee = person by whom tax or any sum is payable, or against whom proceedings are pending, or who is entitled to a refund, or who has a loss assessed (summary; also includes a deemed assessee and an assessee in default); Every assessee is a person, but not every person is an assessee. A person with no tax payable, no refund, no loss assessed and no proceedings is not an assessee.
Tax payable: Tax payable = tax on slabs − rebate (if any) + surcharge (if any) − marginal relief (if any) + 4% cess on the resulting amount; Follow this order. Cess is computed on tax plus surcharge, after rebate and marginal relief. Surcharge applies only above the income limits in the Act. Use the rates given in the question or the rate schedule for the relevant tax year.
Individual slab method (illustrative rates): Illustrative slabs: Up to ₹4,00,000: nil | ₹4,00,001 to ₹8,00,000: 5% | ₹8,00,001 to ₹12,00,000: 10% | ₹12,00,001 to ₹16,00,000: 15% | above ₹16,00,000: higher rates as the question gives; These rates are assumed for illustration only. They are not confirmed law. In the exam, use the rates and any rebate threshold stated in the question or the rate schedule for the relevant tax year.

How to solve Basic Concepts and Definitions under Income-tax Act 2025 questions

Use this method for definition questions, short notes and small tax computation questions on basic concepts.

1Read the question and mark the key term it asks about: tax year, person, assessee, income or rate.
2Write the definition in one or two lines, using the 2025 Act's terms only.
3State the period. Give the tax year as 1 April to 31 March, and say if a new source makes it shorter.
4If the question names an entity, test it against the list of persons. Then decide whether it is an assessee.
5For a rate question, identify the person's status and the regime stated. Then split total income into slabs using the rates given in the question.
6Compute the tax slab by slab, subtract any rebate that the question says applies, and add 4% cess.
7End with one line of conclusion, such as the tax year, the status, or the final tax payable.

Quickest way: Three checks in 60 seconds

When to use it: Use this for MCQs and for short two or three mark parts, when time is tight.

Check the period: is the income of tax year 2026-27 or later? If yes, use the 2025 Act and say tax year.
Check the entity: does it fit the list of persons? Then ask whether tax, a refund or proceedings are involved to decide if it is an assessee.
Check the rate: write slab amounts first, multiply by the rates, add them, then add cess. Do not use a formula for the whole income at one rate.

Common mistakes in Basic Concepts and Definitions under Income-tax Act 2025

Writing previous year and assessment year in answers on the 2025 Act.
The 1961 Act terms are familiar from earlier study and older books.
Fix: Use tax year throughout. Mention the old terms only when a question compares the two Acts.
Treating tax year as always 12 months.
Students remember 1 April to 31 March and forget the newly set up source rule.
Fix: For a new business or source, start the first tax year on the date of setting up or arising and end it on the following 31 March.
Saying person and assessee mean the same thing.
Both terms are used together in tax questions.
Fix: Define an assessee as a person with tax or a sum payable, proceedings against them, a refund due or a loss assessed under the Act. A person with none of these is not an assessee.
Leaving out entities from the list of persons, such as an AOP or a local authority.
Students memorise only individual, HUF, company and firm.
Fix: Learn the full list of persons. Practise by naming an Indian example for each.
Applying the top slab rate to the whole income.
Students confuse slab rates with a flat rate.
Fix: Tax only the part of income in each slab at that slab's rate. Add the slab amounts.
Forgetting the 4% cess or adding it in the wrong order.
Cess is treated as an optional last step, or is applied before the rebate or surcharge.
Fix: Use this order: tax on slabs, less rebate, plus surcharge less marginal relief, plus cess. Cess is computed on tax plus surcharge, after rebate and marginal relief. Show cess as a separate line.

Worked examples

Example 1

Mr Ramesh Iyer, a resident individual, has a salary job. On 1 August 2026 he starts a trading business in Pune. State the tax year for his salary and for his business.

Show the solution

The Income-tax Act, 2025 applies from 1 April 2026, so the tax year concept is used.
Salary is an existing source. Its tax year is the normal one: 1 April 2026 to 31 March 2027.
The business is newly set up on 1 August 2026. Its tax year starts on the date of setting up and ends on 31 March 2027.
So the first tax year for the business is 1 August 2026 to 31 March 2027, which is eight months.

Answer: Salary: tax year 2026-27 (1 April 2026 to 31 March 2027). Business: first tax year is 1 August 2026 to 31 March 2027. There is no previous year or assessment year under the 2025 Act.

Example 2

Meera Nair, a resident individual, has total income of ₹15,00,000 for tax year 2026-27, all taxable at normal slab rates. The question states these assumed slab rates: up to ₹4,00,000 nil; ₹4,00,001 to ₹8,00,000 at 5%; ₹8,00,001 to ₹12,00,000 at 10%; ₹12,00,001 to ₹16,00,000 at 15%. Assume no surcharge and no rebate. Compute her tax using these assumed rates.

Show the solution

Up to ₹4,00,000: nil.
₹4,00,001 to ₹8,00,000 is ₹4,00,000 at 5%, so tax is ₹20,000.
₹8,00,001 to ₹12,00,000 is ₹4,00,000 at 10%, so tax is ₹40,000.
₹12,00,001 to ₹15,00,000 is ₹3,00,000 at 15%, so tax is ₹45,000.
Total tax before cess = ₹20,000 + ₹40,000 + ₹45,000 = ₹1,05,000.
Cess at 4% of ₹1,05,000 = ₹4,200.
Tax payable = ₹1,05,000 + ₹4,200 = ₹1,09,200.

Answer: On the assumed rates given in the question, tax payable is ₹1,09,200, which is tax of ₹1,05,000 plus cess of ₹4,200.

Exam tips

In MCQs, an option that uses previous year or assessment year for tax year 2026-27 is usually the wrong one.
For short notes, give the definition, the period or list, one Indian example and a one-line contrast with the old Act. This gets step marks.
In rate questions, show every slab on its own line. The method earns marks even if one addition is wrong.
Learn the list of persons as a set and practise tagging entities such as a Pune partnership firm or a municipal corporation.
Read the question for the assumptions: regime, residential status, slab rates, any rebate, and whether the income is at normal or special rates.

Practice questions from Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Basic Concepts and Definitions under Income-tax Act 2025: frequently asked questions

What is the difference between previous year and tax year?

Under the 1961 Act, income of the previous year was taxed in the next assessment year. Under the Income-tax Act, 2025, income is taxed in the tax year in which it is earned. So the two-year gap no longer exists.

Is every person an assessee?

No. A person becomes an assessee only if tax or another sum is payable by them, proceedings are on against them, they are entitled to a refund, or they have a loss assessed under the Act. A deemed assessee and an assessee in default are also assessees. A person with none of these is not an assessee.

Who is a person under the Income-tax Act, 2025?

An individual, HUF, company, firm, association of persons or body of individuals, local authority and any other artificial juridical person. The definition is inclusive, so the list is not exhaustive, but most entities fit one of these categories.

Can a tax year be shorter than 12 months?

Yes, for a new source. If a business or profession is newly set up or a new source of income arises during the year, the first tax year for that source begins on that date. It ends on the following 31 March. The person's other income continues in the normal tax year.