Tax Laws and Practice · Direct Tax at a Glance

Basic Concepts and Definitions under the Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

Under the Income-tax Act, 2025, income is taxed for a tax year, the 12 months starting 1 April. Tax is charged on the total income of a person, and an assessee is a person liable to pay tax or any other sum. To answer, define the term, apply it to the facts, then conclude.

Understand Basic Concepts and Definitions

Every tax law starts with a few basic words. If you are clear on them, the rest of Paper 7 Part I becomes easier. The words are tax year, person, assessee, income and charge of tax.

Tax year is the period for which income is measured and taxed. It is the 12 months starting on 1 April and ending on 31 March. Tax year 2026-27 runs from 1 April 2026 to 31 March 2027. If a business is newly set up, or a source of income newly comes into existence, the first tax year runs from that date to the next 31 March.

The old Income-tax Act, 1961 used two terms: previous year (when income is earned) and assessment year (the next year, when it is assessed). The 2025 Act replaces both with one term, tax year. Income earned in a tax year is taxed for that same tax year. Know the old terms only to explain the contrast.

Person is a wide term. It covers an individual, a Hindu undivided family, 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. Assessee is narrower in function. It means a person by whom tax or any other sum is payable under the Act. It also covers a person against whom proceedings are taken, and a person treated as an assessee, such as a representative assessee or an assessee in default. So every assessee is a person, but a person becomes an assessee only when the Act makes him liable or proceedings are taken against him.

Income is defined inclusively, so it is not limited to the listed items. It takes in profits and gains, dividends, winnings from lotteries and games, perquisites and similar receipts. Read the definition as widening the meaning, not closing it. Whether an income is taxable then depends on the charging provision, the head of income and any exemption.

Charge of tax is the rule that makes income taxable. Income-tax is charged for each tax year on the total income of that year, at the rates fixed by the Act and the Finance Act. What is included in total income depends on residential status and where the income arises or is received.

Key rules to remember

Tax year: Tax year = 1 April to 31 March (12 months); For a newly set up business or new source of income, the first tax year runs from the date of setting up or coming into existence to the next 31 March.
Tax year 2026-27: 1 April 2026 to 31 March 2027; Income earned in this period is taxed for the same tax year. There is no separate assessment year in the 2025 Act.
Old terms contrast: 1961 Act: previous year → assessment year; 2025 Act: tax year only; Use this only when the question asks for a comparison.
Person: Person = individual, HUF, company, firm, AOP/BOI, local authority, artificial juridical person; AOP or BOI counts as a person whether or not it is incorporated.
Assessee: Assessee = person liable to pay tax or any other sum (including deemed assessee and assessee in default); A person against whom any proceeding is taken is also an assessee.
Charge of tax: Tax = rate in force × total income of the tax year; Total income depends on residential status, the heads of income, exemptions and deductions.

How to solve Basic Concepts and Definitions questions

Use this order for any question on definitions or the charge of tax. It keeps your answer in ICSI style: provision, application, conclusion.

1Read the question and mark the term asked: tax year, person, assessee, income or charge.
2State the rule or definition in plain words, naming the Income-tax Act, 2025.
3List the facts given: dates, type of taxpayer, nature of receipt.
4For a tax year question, fix the 12-month period from 1 April, or from the start date for a new business or source, to 31 March.
5For a person or assessee question, match the taxpayer to a category of person, then check whether tax or any sum is payable or proceedings are taken.
6For an income question, note that the definition is inclusive, then check the charging rule and any exemption.
7Write a one-line conclusion that answers exactly what was asked.

Quickest way: Three-line definition answer

When to use it: Use this for short 2 to 4 mark questions and for the opening of a longer answer when time is tight.

Line 1: define the term in one sentence using the Act's wording in your own words.
Line 2: give the key condition or inclusion, such as new business start date or categories of person.
Line 3: give a short example with dates or names, then a conclusion.

Common mistakes in Basic Concepts and Definitions

Using assessment year in an answer on the 2025 Act.
Years of habit from the 1961 Act and older notes.
Fix: Write tax year. Mention previous year and assessment year only when comparing the two Acts.
Saying every person is an assessee.
The two words sound the same.
Fix: Say an assessee is a person by whom tax or any other sum is payable, or against whom proceedings are taken, or who is deemed so.
Starting the first tax year of a new business on 1 April.
Students apply the general rule without reading the facts.
Fix: If the business is set up on 10 August 2026, the first tax year runs from 10 August 2026 to 31 March 2027.
Treating the definition of income as a closed list.
Students memorise the items and stop.
Fix: State that the definition is inclusive, so other receipts can still be income if the Act charges them.
Leaving out AOP or BOI, or saying a person must be incorporated.
Students think only of companies and firms.
Fix: Remember that an association of persons or body of individuals is a person whether or not incorporated, and that a local authority is also a person.
Treating income as taxable just because it is income.
Students mix the definition with the charge.
Fix: Income is taxable only when the charge applies, which depends on residential status, the head of income and exemptions.

Worked examples

Example 1

Ramesh starts a trading business on 10 August 2026. Identify his first tax year and explain in which tax year his profit up to 31 March 2027 is taxed.

Show the solution

Rule: the tax year is normally 1 April to 31 March. For a newly set up business, the first tax year runs from the date of setting up to the next 31 March.
Facts: the business is set up on 10 August 2026.
Application: the first tax year starts on 10 August 2026 and ends on 31 March 2027. This is tax year 2026-27.
Income earned in this period is taxed for the same tax year, not for a later year.
Conclusion: Ramesh's first tax year is 10 August 2026 to 31 March 2027, and profit up to 31 March 2027 is taxed for tax year 2026-27.

Answer: First tax year: 10 August 2026 to 31 March 2027 (tax year 2026-27). The profit earned in it is taxed for that same tax year.

Example 2

Distinguish tax year under the Income-tax Act, 2025 from previous year and assessment year under the 1961 Act, using income earned from 1 April 2026 to 31 March 2027.

Show the solution

Under the 1961 Act, the period in which income is earned is the previous year. Here it is 2026-27, from 1 April 2026 to 31 March 2027.
Under the 1961 Act, that income is assessed in the next year, the assessment year. Here it is 2027-28.
Under the 2025 Act, there is a single term, tax year. The same period, 1 April 2026 to 31 March 2027, is tax year 2026-27.
Income is taxed for the tax year in which it is earned, so the separate assessment year is no longer used.
Conclusion: the 2025 Act merges two concepts into one and removes the gap between the earning year and the taxing year in naming.

Answer: 1961 Act: previous year 2026-27 and assessment year 2027-28. 2025 Act: only tax year 2026-27 for the same income.

Exam tips

Use the words tax year in every answer. Use previous year and assessment year only in comparison questions.
Short questions often ask to define person or assessee. Give the full list of persons and one line on the assessee.
In a new business question, always compute the first tax year from the start date to 31 March.
Mention that the definition of income is inclusive, then link it to charge of tax.
End each answer with a clear one-line conclusion, as ICSI examiners expect.

Practice questions from Direct Tax at a Glance

Basic Concepts and Definitions in other exams

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

Basic Concepts and Definitions: frequently asked questions

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

It is the 12 months starting on 1 April and ending on 31 March. For a new business or a new source of income, the first tax year starts on the date of setting up or coming into existence and ends on the next 31 March.

What is the difference between tax year, previous year and assessment year?

The 1961 Act used previous year for the year of earning and assessment year for the following year of assessment. The 2025 Act uses only tax year, so income is taxed for the tax year in which it is earned.

Who is an assessee and how is it different from a person?

A person is any taxpayer type listed in the Act, such as an individual, company or firm. An assessee is a person by whom tax or any other sum is payable, or against whom proceedings are taken, or who is treated as an assessee.

Is the definition of income exhaustive?

No. It is inclusive, so it adds listed items to the ordinary meaning of income. Whether a receipt is taxable still depends on the charge, the head of income and exemptions.