A Quick Understanding Of Tax Year In Income Tax

Indiafirst Life
• 16 May, 2025

If you are a taxpayer, you may be aware that the current tax structure in India includes the financial year (FY) and the assessment year (AY). However, with the introduction of the Income Tax Bill, 2025, the Indian government plans to simplify this.

One of the major updates in the Bill is the replacement of the old system of an FY and an AY with a new term, called the ‘Tax Year’. While this can make the tax compliance process easier for you, you must first understand what the tax year in income tax means, how it will work, and whether it will impact your tax filing.

Keep reading to learn more.

What is the New Tax Year in Income Tax?

As per the new Income Tax Bill 2025 tabled in the Parliament on 13th February 2025, the Tax Year is a 12-month period that starts on April 1 and ends on March 31 of the following year. This period will be used to note the income and determine the tax liability of individuals, businesses, and other entities.

The definition of the tax year in income tax can be flexible in the following cases:

If a new business or profession is starting in the middle of the year: In this case, the tax year will begin from the date of establishment.

If a new source of income arises mid-year: In this case, the tax year for that income starts from the date the income source becomes active.

So, for instance, if you start a business on August 1, 2026, your tax year would be from August 1, 2026, to March 31, 2027. It will not be from 1^st April 2026 onwards.

Thus, for most salaried individuals, the tax year will be from 1^st April to 31^stMarch (of the subsequent year). However, in the two cases described above, the start date of the tax year can be different.

As of now, the tax structure in India includes these two terms:

Previous Year: The year in which the taxpayer earns the income. If a new source of income starts in the middle of the year, the previous year is from that date to March 31.
Assessment Year (AY): The year after the previous year, in which the income is assessed, and tax is paid.

When the Income Tax Bill 2025 is passed in the Parliament, the ‘Tax Year’ will replace these two terms.

How Does the New Bill Refers to the Old Terms?

You may be wondering how the new system of the tax year in income tax will accommodate the assessment year.

The term ‘Assessment Year’ will no longer be used. In its place, the bill uses terms like ‘subsequent tax year’ or ‘financial year succeeding the relevant tax year’.

For example, if you are filing returns in 2027 for income earned in 2026–27, instead of saying ‘Assessment Year 2027–28’, the law will refer to it as ‘Financial Year succeeding Tax Year 2026–27’.

Understanding the Difference Between the Old Vs the New System

To better understand the new tax year in income tax, let’s compare the old and the new systems:

Parameter	New Tax Year	Financial Year (old system)	Assessment Year (old system)
What is it?	The period in which the taxpayer earns and reports the income.	The period in which the taxpayer earns the income. Filing is done after the end of the year.	The year in which the tax authorities assess the taxpayer’s previous year’s income.
Period duration	April 1 - March 31st	April 1 - March 31	April 1 - March 31 (the year following the FY)
Filing period	Filed after the tax year ends.	Referred to when talking about the income earned by the taxpayer.	Referred to for assessing the tax record and making adjustments, if any.

While you have noted the differences, it is important to keep in mind that this change does not affect your filing dates or tax liabilities. The introduction of the new tax year in income tax will just make the entire process easier to understand.

Even though the terms have changed, steps like filing your return and claiming deductions will remain the same.

Along with the introduction of the new tax year, 2025 has seen several changes being proposed during the year’s Union Budget.

Other Tax-related Changes Introduced in Budget 2025**

The Budget 2025 brought several important updates:

Tax Rebate on Salary up to ₹12 lakh

Under Section 87A, the rebate has increased to ₹60,000. This means individuals earning up to ₹12 lakh annually now pay zero income tax. To enjoy the tax rebate on a ₹12 lakh salary, you must have opted for the new regime.
Revised Income Tax Slabs for FY 25-26

The Budget also introduced a new tax slab for FY 25-26, with zero tax liability up to ₹4 lakh and a maximum of 30% for income over ₹24 lakh.
Higher Standard Deduction

The standard deduction under the new regime is now ₹75,000. This means the total tax-free limit is set at ₹12.75 lakh for many salaried employees.
ULIP Taxation Update

Maturity proceeds from Unit-linked Life Insurance Plans or ULIPs with annual premiums over ₹2.5 lakh will now be taxed as capital gains.
Additional Tax-free Investment Option

The Budget saw the introduction of NPS (National Pension Scheme) Vatsalya, a child-focused welfare scheme. NPS Vatsalya can be an ideal addition to your list of tax-free income and investment options. It is an exempt-exempt-exempt (EEE) product. In addition, the investment amount can be claimed on top of the ₹1.5 lakhs maximum deduction limit under Section 80C.

The introduction of the tax year is a welcome move for taxpayers. While it does not change how or when you file your taxes, it simplifies the process and makes it more accessible. To ensure an even simpler process, consider using tools like the income tax calculator. With this tool, you get estimates of your tax liability so you can avoid errors and adjustments later.

** Tax exemptions are as per applicable tax laws from time to time.

by IndiaFirst Life
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