Assessment Year vs Previous Year – Meaning & Illustration
"File your return for AY 2024-25!" - Tax filing ads say. But you earned income in 2023-24! Confused? You're not alone! Let's demystify AY vs PY.
Why Two Different Years?
Simple Logic:
- You earn income during one year (Previous Year)
- You assess & pay tax in the next year (Assessment Year)
Reason: You need full year's income data before calculating tax!
Example: Salary for April 2023 to March 2024 → Known only on April 1, 2024 → File return & pay tax in AY 2024-25
Previous Year (PY)
Definition
Section 3 of Income Tax Act:
"Previous Year means the financial year immediately preceding the assessment year."
Financial Year in India: April 1 to March 31
Simple Meaning
The year in which you EARN the income
Current Example (2024)
PY = FY 2023-24 = April 1, 2023 to March 31, 2024
This is when you:
- Earned salary
- Received rent
- Made business profits
- Sold property (capital gain)
Assessment Year (AY)
Definition
Section 2(9) of Income Tax Act:
"Assessment Year means the period of 12 months commencing on the 1st day of April every year."
Simple Meaning
The year in which:
- Income earned in PY is assessed
- Tax return is filed
- Tax is paid/refunded
Current Example (2024)
AY = 2024-25 = April 1, 2024 to March 31, 2025
During this period, you:
- File return for income earned in FY 2023-24
- Pay balance tax (if any)
- Get refund (if extra paid via TDS)
Relationship Between AY & PY
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Formula: AY = PY + 1
Practical Illustrations
Illustration 1: Salary
Ramesh earns salary:
- April 2023 to March 2024: ₹10 lakh
Question: Which year's income? Which AY to file?
Answer:
- Previous Year: 2023-24 (FY when earned)
- Assessment Year: 2024-25 (when tax return filed)
- Return filing: Between April 1, 2024 to July 31, 2024
Illustration 2: Business Profit
Priya's shop profit:
- April 1, 2023 to March 31, 2024: ₹3 lakh
Answer:
- PY: 2023-24
- AY: 2024-25
- She'll know total profit only on March 31, 2024 (after year ends)
- File return by July 31, 2024
Illustration 3: House Rent
Suresh received rent:
- May 2023 to April 2024rent: ₹1.5 lakh
Wait! Rent period crosses two financial years!
Answer:
- Accrual basis: Rent for each FY counted separately
- PY 2023-24: May 2023 to March 2024 (11 months) = ₹ 1,37,500
- PY 2024-25: April 2024 (1 month) = ₹12,500
Comparison Table
| Aspect | Previous Year (PY) | Assessment Year (AY) |
|---|---|---|
| Meaning | Year of earning income | Year of assessing & paying tax |
| Period | April 1 to March 31 | April 1 to March 31 (next year) |
| Section | Section 3 | Section 2(9) |
| Activity | Earning, business, transactions | Filing return, assessment, payment |
| Example | FY 2023-24 | AY 2024-25 |
| Relationship | - | AY = PY + 1 |
Quick Reference Chart
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Special Cases
1. New Business
Business started: June 15, 2023
Question: What is PY?
Answer:
- First PY: June 15, 2023 to March 31, 2024 (9.5 months)
- Not full year - still considered PY 2023-24
- AY: 2024-25
2. Business Closed
Business closed: December 31, 2023
Answer:
- Last PY: April 1, 2023 to December 31, 2023 (9 months)
- AY: 2024-25
- Return due: Within prescribed time (even though business closed)
3. Change from Accounting Year to Financial Year
Company follows calendar year (Jan-Dec) accounting
Problem: Tax law requires financial year (Apr-Mar)
Solution: Section 3 allows different accounting year BUT
- Must calculate taxable income for financial year
- Or take permission from Income Tax authorities
Return Filing Timeline
For Income Earned in PY 2023-24:
| Taxpayer | Due Date (AY 2024-25) |
|---|---|
| Individual (non-audit) | July 31, 2024 |
| Individual (audit required) | October 31, 2024 |
| Company | October 31, 2024 |
| Partnership Firm (audit) | October 31, 2024 |
Belated return: Can file up to December 31, 2024 (with penalty)
Common Mistakes
❌ Mistake 1: Writing AY instead of PY
- Earned in 2023-24 but write "Income for AY 2023-24"
- ✅ Correct: "Income for PY 2023-24 (AY 2024-25)"
❌ Mistake 2: Filing for wrong year
- Earned in 2022-23, but file for AY 2024-25
- ✅ Correct: File for AY 2023-24
❌ Mistake 3: Using calendar year
- Income from Jan 2023 to Dec 2023
- ✅ Must split: Jan-Mar 2023 (PY 2022-23) + Apr-Dec 2023 (PY 2023-24)
Memory Trick 🧠
PY = Past Year (when you EARNED - in the past)
AY = Action Year (when you take ACTION to file & pay)
AY always comes AFTER PY (like tomorrow comes after today!)
Summary
- Previous Year (PY): Financial year when income is earned (April 1 to March 31)
- Assessment Year (AY): Year when income is assessed & taxed (PY + 1 year)
- Relationship: AY = PY + 1 (always!)
- Current: Income earned in PY 2023-24 → Filed & taxed in AY 2024-25
- Due date: July 31, 2024 for individuals (non-audit)
- Section: PY (Section 3), AY (Section 2(9))
Quiz Time! 🎯
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Next Chapter: Person – Taxable Entities under Income Tax Act! 👥