The government levies income tax on the annual income of an individual. Income tax is calculated from a period starting from 1st April and ending on 31st March of a calendar year.
The income tax law classifies the calendar year as:
- Previous year1: The year in which income is earned is called a previous year.
- Assessment year: The year in which the income is charged for taxation is called an assessment year.
For example, income earned during the period of 1st April, 2020 to 31st March, 2021 by an individual is income of the previous year 2020-21. The income of the previous year 2020-21 is taxable in the next year, i.e., in the assessment year 2021-22.
Previous Year for Businesses2
However, for businesses or professions, the “previous year” is the period beginning with
- The date of setting up of the business or profession; or
- The date on which the source of income newly comes into existence,
and ending with the said financial year.
- Section 3, Income Tax Act, 1961
- Proviso to Section 3, Income Tax Act, 1961