Income Tax Bill 2025: The recently introduced Income Tax Bill 2025 contains several modifications to the taxation process and calculation of taxable income. A significant alteration in the updated tax system is the introduction of the concept of a tax year, which is defined in Clause 3 as a twelve-month period starting on the 1st of April during the financial year. The previous notions of the previous year and assessment year have been eliminated.
It is important for taxpayers to be aware that the financial year remains unchanged, beginning on April 1 and ending on March 31. The upcoming income tax legislation will not adhere to the traditional calendar year for tax purposes.
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Vivek Jalan, Partner, Tax Connect Advisory Services LLP, “Due to the concept of “Tax Year,” there might be questions whether the period 1.4.26 to 31.3.27 would be in conflict between old and new acts. However, this is not to be as it will be Assessment Year 2026-27 of the Income-tax Act, 1961 and will pertain to the income of a taxpayer for the previous year 2025-26 and not to the income of the financial year 2026-27; It will be the tax year 2026-27 of the new Act. It will pertain to the income of a taxpayer for the financial year 2026-27.”
“The assessment for income of the previous year (financial year) 2025-26 of a taxpayer shall be done as per the provisions of the Income-tax Act, 1961 for the assessment year 2026-27; The assessment for income of tax year (financial year) 2026-27 of a taxpayer shall be done as per the provisions of the Bill for tax year 2026-27,” Jalan further explained.
“The “tax year” will be a 12-month period that begins on April 1st and ends on March 31st of the following year. This alignment means that all income earned during this period will be assessed in the same period, simplifying tax planning and compliance for individuals and businesses alike. For newly established businesses or professional practices, the tax year will start from the date of establishment and run until the end of the financial year, making it easier for new entities to comply with tax regulations from day one. Similarly, if a new source of income arises during the year, the tax year for that particular income will start from the date the income source is initiated,” said Shefali Mundra, Tax Expert, ClearTax.
Tax year definition
Current rule
The financial year commences on April 1 of a specific year and concludes on March 31 of the following year. This means that for FY25, which is presently ongoing, the period commenced on April 1, 2024, and will end on March 31, 2025.
For taxation purposes, any income earned by an individual or entity (company or organization) during this timeframe will be considered their earnings. Consequently, taxes will be calculated based on the total amount earned within this period.
On the other hand, the assessment year follows the financial year. It is a term solely related to taxation and refers to the duration in which an individual must file taxes and returns pertaining to the income they acquired during a financial year.
Consequently, for the income earned in FY25, the taxes and returns will be filed during AY26, which starts on April 1, 2025, and concludes on March 31, 2026.
Proposed rule
The new bill seeks to streamline terminology in tax calculations by introducing the term ‘tax year’ to replace ‘financial year’ and ‘assessment year’. This term will denote the period during which an individual earns income, on which taxes will be calculated the next year.
In essence, the replacement of ‘financial year’ with ‘tax year’ and the elimination of ‘assessment year’ are expected to simplify the tax filing process for taxpayers who found the previous terminology confusing.
“The term “tax year” has been defined under section 3 of the ITB to mean the twelve months period of the financial year commencing on the 1st April. Further in case of a business / profession newly set up, or a source of income newly coming into existence in any financial year, the tax year shall be the period beginning with (a) the date of setting up of such business or profession; or (b) the date on which such source of income newly comes into existence, and in both cases ending with the said financial year. In the new ITB, the term “tax year” has replaced the terms such as “Assessment Year” or “Previous Year”, which in many cases were misconstrued by the taxpayers. This was an expected change and would definitely provide more clarity to the domestic and foreign taxpayers to clearly decipher the provisions of the ITB and the specific year to which reference is made,” said CA (Dr.) Suresh Surana.