Tax Laws and Practice · Basic Concept of Income Tax

Basic Concept of Income Tax and Key Definitions

Updated 11 October 2026 · Fact-checked

Income tax is a direct tax charged on the income of a person for a tax year under the Income-tax Act, 2025. To solve questions, identify whether the taxpayer is a person, whether they are an assessee, what counts as income, and which tax year applies. The tax year is the twelve-month financial year starting 1 April.

Understand Introduction to Income Tax and Key Definitions

Income tax is a direct tax. The person who earns the income bears the tax and pays it to the Central Government. It is levied on income, not on wealth or on goods. The Union can levy it because the Constitution gives it this power.

For your June 2027 attempt, the law is the Income-tax Act, 2025, as amended by the Finance Act, 2026. It replaces the Income-tax Act, 1961. The Act sets out the framework: definitions, charge, exemptions, heads of income, computation, returns, assessment, appeals and penalties. The tax rates for each year are fixed by the Finance Act.

The biggest change in terminology is the tax year. Under the 1961 Act you had to learn two periods, the previous year (when income is earned) and the assessment year (when it is assessed). The 2025 Act uses a single idea. The tax year means the twelve-month period of the financial year commencing on 1 April. So tax year 2026-27 runs from 1 April 2026 to 31 March 2027. Use the old terms only when the question asks you to contrast the two Acts.

If a business or profession is newly set up, or a source of income newly comes into existence, during a financial year, the tax year is shorter. It begins on the date of setting up (or the date the source comes into existence) and ends on 31 March of that financial year. This is a short tax year.

Two more terms are asked again and again. A person is the wide category of taxable entities: an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals, a local authority, and every other artificial juridical person. An assessee is a person by whom tax or any other sum of money is payable under the Act. It also covers a person against whom a proceeding is taken under the Act, a deemed assessee and an assessee in default. Every assessee is a person, but not every person is an assessee. Income is defined inclusively. It covers profits and gains, dividends and similar receipts, so you cannot treat the word as limited to salary or business profit.

Key rules to remember

Tax year: Tax year = twelve months of the financial year commencing on 1 April (1 April to 31 March); Stated in section 3(1) of the Income-tax Act, 2025. It replaces the previous year and assessment year of the 1961 Act.
Tax year of a new business or source: Tax year = date of setting up (or date source comes into existence) to 31 March of that financial year; Stated in section 3(2). Count from the actual date, not from 1 April.
Person and assessee: Every assessee is a person; a person becomes an assessee only if tax or any sum is payable by them, or a proceeding is taken against them, or they are a deemed assessee or an assessee in default; Use this to answer the 'difference between person and assessee' question.
Categories of person: Individual, HUF, company, firm, AOP/BOI, local authority, artificial juridical person; Write the full list in exams. A person can be a person even if it has no income.

How to solve Introduction to Income Tax and Key Definitions questions

Use this method for any question on the nature of income tax and its basic definitions.

1Read the question and mark what is being asked: a definition, a distinction, a period, or an application to facts.
2Name the Act first: the Income-tax Act, 2025, as amended by the Finance Act, 2026, for June 2027.
3For a definition, state the term in plain words, then list its parts, such as the categories of person.
4For a distinction, give two or three differences and an example for each side, such as a person who is not an assessee.
5For a period question, apply section 3(1) for a normal tax year or section 3(2) for a new business or source, and write the exact start and end dates.
6Apply the rule to the facts given, naming each party and date.
7Close with a one-line conclusion that answers the question directly.

Quickest way: Four-question check

When to use it: Use it when time is short and the question gives facts about a taxpayer or a date.

Who is it? Identify the category of person, if any.
Is any tax or sum payable, or any proceeding taken? If yes, the person is an assessee.
What is the date of setting up or of the source coming into existence? If it falls inside a financial year, the tax year starts from that date.
Write the tax year as 'from (date) to 31 March (year)' and state the conclusion.

Common mistakes in Introduction to Income Tax and Key Definitions

Using 'previous year' and 'assessment year' as the tax periods under the 2025 Act.
You studied the 1961 Act first or used old notes.
Fix: Use 'tax year' for June 2027. Mention previous year and assessment year only when contrasting with the 1961 Act.
Treating 'person' and 'assessee' as identical.
Both words are used loosely for a taxpayer.
Fix: Remember that person is the wider class. A person becomes an assessee only when tax or a sum is payable, or a proceeding is taken, and so on.
Leaving out categories from the list of persons.
Students remember individual and company and forget the rest.
Fix: Learn the list in order: individual, HUF, company, firm, AOP/BOI, local authority, artificial juridical person.
Giving a full twelve-month tax year to a business started mid-year.
You assume a tax year always starts on 1 April.
Fix: Under section 3(2), start from the date of setting up and end on 31 March of that financial year.
Saying income tax is levied on wealth or on goods.
Direct and indirect taxes get mixed up.
Fix: State that income tax is a direct tax on income, where the person earning the income bears it.
Quoting section numbers for definitions that you are unsure of.
You carry old 1961 numbers into the 2025 Act.
Fix: Quote a section only if you are certain of it. Section 3 for tax year is safe. Otherwise name the Act and give the rule in words.

Worked examples

Example 1

Meera Textiles starts a new manufacturing business on 1 August 2026. Find its first tax year and explain the rule.

Show the solution

Provision: under section 3(2) of the Income-tax Act, 2025, where a business is newly set up in a financial year, the tax year begins on the date of setting up and ends with that financial year.
Facts: the business is set up on 1 August 2026. This falls in the financial year 2026-27, which ends on 31 March 2027.
Analysis: the tax year does not start on 1 April 2026, because the business did not exist then.
Conclusion: the first tax year runs from 1 August 2026 to 31 March 2027.

Answer: The first tax year is 1 August 2026 to 31 March 2027, a period of eight months. The following tax year 2027-28 will be the full twelve months from 1 April 2027.

Example 2

Ravi, an individual, has a small income. No tax is payable by him and no proceeding has been taken against him. Sunita Exports Ltd has a loss for the year, but an assessment proceeding has been taken against it. Who is a person and who is an assessee?

Show the solution

Provision: a person includes an individual, a HUF, a company, a firm, an AOP/BOI, a local authority and any other artificial juridical person.
An assessee is a person by whom tax or any other sum is payable, or in respect of whom a proceeding is taken under the Act, among other cases.
Ravi is an individual, so he is a person. No tax or sum is payable by him and no proceeding is pending, so he is not an assessee on these facts.
Sunita Exports Ltd is a company, so it is a person. A proceeding has been taken in respect of its income or loss, so it is an assessee even though it has a loss.
Conclusion: both are persons, but only Sunita Exports Ltd is an assessee.

Answer: Ravi is a person but not an assessee on the given facts. Sunita Exports Ltd is both a person and an assessee, because a proceeding is pending against it.

Exam tips

Write 'tax year' in every answer for June 2027, and mention the older terms only for contrast.
Learn section 3 well, because both sub-sections can be tested through short date-based problems.
Give the full list of persons and the full meaning of assessee. Short answers lose marks here.
For 'difference' questions, use two or three clear points with a one-line example for each.
Name the Income-tax Act, 2025 in your opening line, then give the rule and a short conclusion.

Practice questions from Basic Concept of Income Tax

Introduction to Income Tax and Key Definitions: frequently asked questions

What is the tax year under the Income-tax Act, 2025?

The tax year is the twelve-month period of the financial year commencing on 1 April, as stated in section 3(1). For a business or source newly set up, it begins from the date of setting up or commencement and ends on 31 March of that financial year.

Has the Income-tax Act, 2025 abolished previous year and assessment year?

The 2025 Act uses one term, the tax year, in place of the previous year and assessment year of the 1961 Act. For June 2027 you should write answers in terms of tax year.

What is the difference between a person and an assessee?

A person is any entity in the listed categories, such as an individual, HUF, company or firm. An assessee is a person who owes tax or another sum, or against whom a proceeding is taken, among other cases. So every assessee is a person, but a person need not be an assessee.

Do I need to remember section numbers for definitions?

Quote a section only if you are sure of it, such as section 3 for tax year. For other definitions, name the Income-tax Act, 2025 and state the rule clearly in words.