Income Tax : "Don't Get Confused! A Simple Breakdown of Previous Year & Assessment Year"
The term "Previous Year" is primarily used in taxation and accounting, especially in the context of income tax laws in countries like India. Below is a detailed explanation:
Definition of
Previous Year
The Previous
Year refers to the financial year (FY) immediately preceding the assessment
year (AY) in which the income was earned. It is the year for which income
is assessed for tax purposes in the following year.
Concept of
Previous Year in Income Tax
- As per Section 3 of the Income Tax Act, 1961
(India), the previous year is defined as the financial year
immediately before the assessment year.
- It starts on April 1st of a given year and
ends on March 31st of the following year.
For example:
- If the Assessment Year (AY) is 2024-25, the Previous
Year (PY) is 2023-24 (i.e., from April 1, 2023, to March 31, 2024).
- The income earned during the Previous Year
(2023-24) is assessed and taxed in the Assessment Year (2024-25).
Key Aspects
of the Previous Year
- Income Earned Basis: The income earned in
the previous year is assessed for tax purposes in the subsequent
assessment year.
- Uniformity: For individuals, businesses, and
companies, the previous year is generally from April 1st to March 31st.
- New Business or Profession: If a new
business starts during the year, its previous year begins from the date
of commencement and ends on March 31st of that financial year.
Difference
Between Previous Year and Assessment Year
|
Aspect |
Previous Year (PY) |
Assessment Year (AY) |
|
Definition |
The year in which income is earned |
The year in which tax is assessed and paid |
|
Time Period |
April 1 to March 31 |
April 1 to March 31 (following year) |
|
Example (for FY 2023-24) |
April 1, 2023 – March 31, 2024 |
April 1, 2024 – March 31, 2025 |
|
Income Treatment |
Income is generated |
Income is assessed and taxed |
Exceptions to
the Concept of Previous Year
- In the case of a newly incorporated business or
profession, the previous year begins from the date of commencement
of business.
- In the case of a non-resident or newly arriving
taxpayer in India, the previous year may be determined differently
based on their date of arrival or establishment.
Conclusion
The Previous Year is an essential concept in taxation, as it determines the period in which income is earned before being assessed for tax in the Assessment Year. Understanding this concept helps individuals and businesses comply with tax laws and file their returns accurately.
Example to
Understand "Previous Year" Easily
Let's say Amit
is a software engineer. He works and earns a salary every month.
Step-by-Step
Example:
- Income Earned (Previous Year)
- Amit works from April 1, 2023, to March 31,
2024 and earns a salary every month.
- This period is called the Previous Year 2023-24,
because it's the time when he actually made money.
- Filing Tax (Assessment Year)
- Now, in the next financial year, i.e., April 1,
2024 – March 31, 2025, Amit has to declare his income and pay tax
for the money he earned in the Previous Year.
- This new period is called the Assessment Year
2024-25, because the government will assess and tax Amit’s income
from the Previous Year.
Example Table
for Clear Understanding:
|
Year in Which Amit Earned Money |
Year in Which Amit Pays Tax on That Money |
|
April 1, 2023 – March 31, 2024 (Previous Year) |
April 1, 2024 – March 31, 2025 (Assessment Year) |
Another
Example – Business Income
- Ravi runs a shop and earns ₹10 lakh between April
1, 2023, and March 31, 2024.
- This is Previous Year 2023-24.
- In Assessment Year 2024-25, Ravi will
calculate his total earnings, deduct expenses, and then pay tax
accordingly.
👉 Easy Formula to
Remember:
💰
When You Earn = Previous Year
💸
When You Pay Tax = Assessment Year
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