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The new Income Tax bill that the government is likely to table today in the Parliament is going to get rid of the terms financial year (FY) or assessment year (AY) to simplify matters for Indian taxpayers.
Instead, the government is likely to introduce the term 'Tax Year'.
Here is how 'Tax Year' has been defined:
"Tax Year" is defined as:
"A financial year beginning on the 1st day of April and ending on the 31st day of March of the following year."
This replaces the "Previous Year" concept from the Income Tax Act, 1961.
Comparison with Income Tax Act, 1961
Previous Year: The year in which income is earned (April 1 to March 31). This has been replaced by Tax Year (also April 1 to March 31)
Assessment Year: The year following the previous year, when tax is calculated. The draft bill gets rid of this term. There will be no separate Assessment Year. Tax Year will be covering both earning and assessment years.
Benefits of Tax Year
The primary benefit of Tax Year is that this will remove the confusion between Previous Year and Assessment Year.
This will also help India fall in line with international standards since many countries follow the concept of a singular tax year.
Advance tax computation will also be made easier since taxpayers will be able to refer to the Tax Year alone instead of navigating through Previous Year and Assessment Year.
An example of how Tax Year will work
According to the Income Tax Act 1961, if a person earns in the year April 1, 2024 – March 31, 2025, this time period will be known as the Previous Year and 2025-26 when tax will be assessed for said income, that time period is known as the Assessment Year.
In the new draft bill, if a person earns in the year April 1, 2025 – March 31, 2026, it will simply be known as Tax Year 2025-26. This gets rid of multiple terms and simplifies the entire process.