Library / Income-tax Act, 2025: The Professional's Master Guide
3. Tax Year (Section 3)
Under the old law, income of the "previous year" was taxed in the following "assessment year". This confused many taxpayers. The 2025 Act uses one term: Tax Year, which is the twelve months from 1 April to 31 March.
Old wording | New wording |
|---|---|
Previous Year 2026-27, Assessment Year 2027-28 | Tax Year 2026-27 |
"Income of AY 2027-28" | "Income of Tax Year 2026-27" |
"Return for AY 2027-28" | "Return for Tax Year 2026-27" |
3.1 New business or new source of income
If a business or profession is set up, or a new source of income comes into existence, during the year, the first tax year starts on that date and ends on the next 31 March.
Illustration 2: New LLP GreenLeaf Advisors LLP is incorporated and starts business on 10 November 2026. Its first tax year is 10 November 2026 to 31 March 2027 (Tax Year 2026-27). From then on, each tax year is a full April to March year. |
Key point Returns, assessments and notices still happen after the tax year ends. Only the naming has changed. The return for Tax Year 2026-27 is still filed in 2027. |
3.2 Transition situations you will meet in 2026 and 2027
Because the changeover happened on 1 April 2026, some transactions fall across the two Acts. The general rule is that the law in force on the date of the relevant event applies, and for income, the tax year of accrual or receipt decides.
Situation | How to treat it |
|---|---|
Salary for March 2026 paid on 5 April 2026 | Income of FY 2025-26 (salary is taxed on due basis). TDS on payment in April 2026 is deducted under section 392 of the 2025 Act, but credit belongs to FY 2025-26 income. |
FD interest accruing from October 2025 to September 2026, paid on maturity | Split by accrual: the part accruing up to 31 March 2026 belongs to FY 2025-26 (1961 Act) for a person on mercantile basis; the rest to Tax Year 2026-27. A person on cash basis taxes it on receipt in Tax Year 2026-27. |
Advance tax instalment of 15 March 2026 | Relates to FY 2025-26 under the 1961 Act. |
Asset bought in 2020, sold in August 2026 | Capital gain arises in Tax Year 2026-27 and is computed under the 2025 Act. Holding period includes the entire period since 2020. |
Loss of FY 2023-24 carried forward | Set off under the 2025 Act from Tax Year 2026-27 for the remaining years of its original life. |
Notice for FY 2022-23 issued in 2026 | Proceedings for that year follow the 1961 Act procedure, as saved by section 536. |
TDS certificate for deduction in March 2026 | Old form (Form 16 or 16A) because the deduction was under the 1961 Act. |
3.3 Special cases of shorter or accelerated tax years
The Act contains provisions that allow income to be assessed earlier than usual in certain situations, to protect revenue. These are carried over from the 1961 Act in substance:
- Shipping business of non-residents: tax on freight is collected at the port before the ship leaves, at a presumptive rate.
- Persons leaving India: where the Assessing Officer believes a person may leave India with no intention of returning, the income up to the date of departure can be assessed immediately.
- Bodies formed for a single event or purpose: an AOP or BOI likely to be dissolved can be assessed immediately after the event.
- Persons likely to transfer property to avoid tax: assessment can be made early.
- Discontinued business: income up to the date of discontinuance can be assessed in that year itself.
Illustration 3: Discontinued business A proprietor closes his trading business on 30 September 2026 and moves abroad. His business income from 1 April 2026 to 30 September 2026 belongs to Tax Year 2026-27. The department can assess it immediately after closure instead of waiting for the normal return cycle, and he should settle all TDS and advance tax before leaving. |
Chapter summary • "Tax Year" (1 April to 31 March) replaces previous year and assessment year. • A new business or source has a first tax year from its start date to 31 March. • Transition items are allocated by the date of accrual or receipt and the year of the event. • Special provisions allow early assessment in cases such as persons leaving India or discontinued businesses. |
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