As per the law, income earned by you is taxable in the next year. In this case the year does not start from January and ends in December. It’s a 12 month period which starts at the beginning of April and ends on 31st March.
The year in which income earned is referred to as previous year and the next year in which such income is taxable is known as assessment year.
Most of the time you will find the previous year is referred to as “PY” and assessment year is referred to as “AY”.
For instance income earned by you in the financial year starting from 01-04-2023 to 31-03-2024 is taxable in the year starting from 01-04-2024 to 31-03-2025. In this case, the period starting from 01-04-2023 to 31-03-2024, in which income is earned is known as previous year and period starting from 01-04-2024 to 31-03-2025, in which income is taxable is referred to as assessment year.
In other words, income earned in the PY 2023-24 is taxable in the AY 2024-25.
Similarly income earned in the previous year 2022-23 is taxable in the assessment year 2023-24
Why is the previous year and assessment year relevant?
As per law, income earned by you in a previous year is taxed during the following assessment year at the rates prescribed for such assessment year by the finance act.
Every year, in the budget income tax rates for a financial year are prescribed. In budget 2023, income tax rates for the previous year 2023-24 (AY 2024-25) were prescribed.
The income generated during the period starting from 01-04-2024 to 31-03-2025 is taxable the following year starting from 01-04-2025 to 31-03-2026.
Table showing previous year and their respective assessment year;
| Previous year | Assessment year |
| 2020-21 (Period starting from 01-04-2020 to 31-03-2021) | 2021-22 (Period starting from 01-04-2021 to 31-03-2022) |
| 2021-22 (Period starting from 01-04-2021 to 31-03-2022) | 2022-23 (Period starting from 01-04-2022 to 31-03-2023) |
| 2022-23 (Period starting from 01-04-2022 to 31-03-2023) | 2023-24 (Period starting from 01-04-2023 to 31-03-2024) |
| 2023-24 (Period starting from 01-04-2023 to 31-03-2024) | 2024-25 (Period starting from 01-04-2024 to 31-03-2025) |
Exception to the above rules of previous year and assessment year
In case of a newly set up business, the period will start from the date of commencement of business instead of that year’s 1st of April.
For instance, if you have started your business on 01-12-2023, then your previous year (PY) will start from 01-12-2023 and end on 31-03-2024. Next year, it will start from 01-04-2024. Therefore the first PY in case of a newly set up business can be less than 12 months.
In the following four cases, income of the previous year will be taxable in the same year instead of waiting for the assessment year to commence.
Shipping business of non residents
In case of a shipping business, the master of the ship is required to submit a return of income before the departure of the ship from the Indian port.
Which means, he is required to submit a return of income taxable in the same year in which freight, fare and other incomes are collected and not in the immediately following assessment year.
If the assessing officer is satisfied, then such return of income can be submitted within 30 days from the date of departure of the ship.
In absence of payment of tax or satisfactory arrangement has been made, the ship will not be allowed to depart. Which means port clearance will not be granted.
Persons leaving India
If a person has no present intention of returning to India or the AO thinks that a person may leave India during the PY, then the total income of such individual up to the date of probable departure from India shall be chargeable to income in the same year instead of waiting for the following assessment year.
Short duration bodies
Sometimes, a certain association of persons or a body of an individual or an artificial judicial person is required to be incorporated for a particular event or purpose.
If after incorporation, it’s likely to be dissolved or the AO thinks that it most likely will be dissolved, then the AOP, BOI or artificial judicial person is required to file tax return from the start date, if started during the same year, to the date of dissolution. If the start date is earlier to 1st April, then they have to file a return of income for the period starting from 1st of April till the date of dissolution.
A person is transferring property to avoid tax
If the AO came to know that a person is most likely to sell, transfer or dispose of any movable or immovable property to avoid tax, then the person is most likely required to pay tax and file return of income in the same AY.
Discontinued business or profession
If a business or profession is discontinued, then income earned during the period starting from 1st April of the assessment year till the date of discontinuation is required to be taxed in the same AY.
