Assessment Year vs Previous Year – Meaning & Illustration
Income earned in FY 2024-25 is taxed in AY 2025-26. Confused? You're not alone! Let's decode these fundamental tax concepts with crystal clarity.
The Two Key Years
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Simple rule: Tax on last year's income paid this year
Previous Year (PY) - Definition
Section 3: Year in which income is earned
Also called: Financial Year (FY)
Duration: April 1 to March 31 (12 months)
Example:
- Income earned: April 1, 2024 to March 31, 2025
- Previous Year: FY 2024-25 or PY 2024-25
Assessment Year (AY) - Definition
Section 2(9): Year immediately following the previous year
Purpose: Year in which income is assessed and tax is paid
Duration: Also April 1 to March 31, but next year
Example:
- Income earned in: FY 2024-25
- Assessment Year: AY 2025-26 (April 1, 2025 to March 31, 2026)
The Timeline
Example for current year:
FY 2024-25 (Previous Year):
- April 1, 2024 to March 31, 2025
- You earn salary, rent, dividends
- Employer deducts TDS monthly
AY 2025-26 (Assessment Year):
- April 1, 2025 to March 31, 2026
- File return by July 31, 2025
- Final tax calculated
- Refund/payment processed
Visual Representation
Timeline:
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Apr 2024 Mar 2025 Mar 2026
| | |
└──────PY────────┘ |
(Earn Income) |
└──────AY────────┘
(File Return & Pay Tax)
Income in PY 2024-25 → Taxed in AY 2025-26
Practical Examples
Example 1: Salaried Employee
Mr. Sharma:
- Salary earned: April 2024 - March 2025 = ₹12,00,000
- Previous Year: FY 2024-25
- Tax return filed: July 2025
- Assessment Year: AY 2025-26
Tax calculated on ₹12L in AY 2025-26!
Example 2: Business Income
Shopkeeper:
- Business profit: April 2024 - March 2025 = ₹5,00,000
- PY: 2024-25
- Return filing: By July 31, 2025 (or Sept with audit)
- AY: 2025-26
Example 3: Rental Income
Property owner:
- Rent received: ₹30k/month × 12 (Apr 2024 - Mar 2025) = ₹3,60,000
- Previous Year: 2024-25
- Assessment Year: 2025-26 (file return in July 2025)
Why This System?
Reason 1: Time to calculate
- Need time to compute total income after year ends
- Compile documents, calculate deductions
Reason 2: TDS Adjustment
- TDS deducted throughout PY
- Final adjustment in AY when filing return
Reason 3: Administrative ease
- Government needs time to process returns
- Segregate years for assessment
Key Dates for AY 2025-26
| Event | Date |
|---|---|
| PY ends | March 31, 2025 |
| Form 16 issued | By June 15, 2025 |
| ITR filing (individuals, no audit) | By July 31, 2025 |
| ITR filing (audit cases) | By September 30, 2025 |
| Belated return | By December 31, 2025 |
How to Write AY and PY
Format:
- PY: 2024-25 (income earning year)
- AY: 2025-26 (tax payment year)
- FY: 2024-25 (same as PY)
On ITR Form:
- Assessment Year: 2025-26
- Financial Year: 2024-2025
Example notations:
- "Income for PY 2024-25 assessed in AY 2025-26"
- "Return for AY 2025-26" (means income of FY 2024-25)
Special Cases
Case 1: New Business Started Mid-Year
Business started: October 1, 2024
Previous Year: Oct 1, 2024 to March 31, 2025 (only 6 months!)
Assessment Year: AY 2025-26
Note: First PY can be less than 12 months
Case 2: Business Closed
Business closed: December 31, 2024
PY: April 1, 2024 to Dec 31, 2024 (9 months)
AY: AY 2025-26
Case 3: Deceased Person
Mr. Verma died: November 15, 2024
PY: April 1, 2024 to Nov 15, 2024
AY: AY 2025-26 (legal heir files return)
Common Mistakes
❌ "AY 2024-25 means income of 2024-25" → Wrong!
✅ AY 2025-26 means income of FY 2024-25
❌ Filing for "FY 2025-26" → Doesn't exist yet!
✅ File for AY 2025-26 (income of FY 2024-25)
❌ Confusing PY with AY
✅ Remember: PY = Earn, AY = Pay tax
Comparison Table
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Multiple Years Example
| Income Period | Previous Year | Assessment Year | Return Due Date |
|---|---|---|---|
| Apr 2023 - Mar 2024 | FY 2023-24 | AY 2024-25 | July 31, 2024 |
| Apr 2024 - Mar 2025 | FY 2024-25 | AY 2025-26 | July 31, 2025 |
| Apr 2025 - Mar 2026 | FY 2025-26 | AY 2026-27 | July 31, 2026 |
Pattern: AY is always PY + 1
Practical Tip
When someone asks: "Which year's return should I file?"
Current date: September 2025
Answer: "AY 2025-26" (which covers income of FY 2024-25)
Not: "2025 year return" (ambiguous!)
Summary
- Previous Year (PY): Year when income is earned (April 1 - March 31)
- Assessment Year (AY): Year immediately following PY when income is assessed and taxed
- Financial Year (FY): Same as Previous Year
- Formula: AY = PY + 1 (e.g., PY 2024-25 → AY 2025-26)
- Income earned in FY 2024-25 → Taxed in AY 2025-26 → Return filed by July 31, 2025
- PY can be less than 12 months: For new business, closure, or death
- ITR form: Fill Assessment Year (e.g., 2025-26 for current income)
Quiz Time! 🎯
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Next Chapter: Person - Taxable Entities! 👥
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