What Is Previous Year In Income Tax: Section 3 Provisions And Exceptions For Taxation
‘Previous Year’ in the Income Tax Act, 1961 is an important concept associated with the payment of income tax in India. According to Section 3, the previous year is the year preceding the assessment year. Also known as the Financial year, it starts from 1st April to 31st March of the following year.
Read on to know details about the previous year in income tax, its importance, the difference between financial and assessment years and exceptions for taxation.
What is Previous Year in Income Tax?
Section 3 of the Income Tax Act has defined a previous year as the financial year. It is the period between 1st April and 31st March of the next year. If the income source or business is new, the ‘previous year’ for the new business will start from when it was set up and end on the 31st March of said financial year.
What is an Assessment Year?
Section 2 (9) of the Income Tax Act has defined an assessment year as the 12 months starting from 1st April and ending on 31st March when an individual needs to file returns on the previous year’s income. Income Tax authorities assess an individual’s income earned in the previous year in the assessment year.
Provisions under Section 3 of the Income Tax Act
According to Section 3 of the Income Tax Act, the previous year will be considered from the date the source of income came into existence, if it’s a new business, till the 31st March of the said financial year. This means that when a new business starts or a new source of income comes into existence, the previous year might be less than 12 months. However, the next financial year will be the entire 12 months (April to March).
Difference between an Assessment Year and a Previous Year
The table below provides key differences between the previous year and the assessment year:
| Criteria of Comparison | Previous Year (Financial Year) | Assessment Year |
| Definition | The year when an individual earns income | The year when IT authorities assess the income |
| Financial Year | 12 months or less | 12 months |
| Time | 12 months or less, depending upon when the income source started/stopped operating | 12 months |
| Purpose | Important because the income is earned in this year. Therefore the data collected will be from this year | Significant because of analysing the submitted data and calculating the appropriate tax payable |
Exceptions for Taxation of Income earned in Previous Year
Given below are exceptions for taxation of income earned in the previous year:
- Section 172 – Income earned by a non-resident through a shipping business in India
Section 172 of the Income Tax Act has incorporated guidelines for a Non-Resident Indian’s shipping business.
Given below are its important features:
- If a non-resident’s ship transports passengers, livestock, mail and goods, authorities will allow its operations only after the requisite tax is paid.
- Moreover, 7.5% of the amount paid to the owner or any person on his behalf for carriage, in or outside India, will be considered as income that is accruing in India.
- Additionally, the shipmaster needs to submit the amount and details of passengers/livestock/goods/mails ferried to the Assessing Officer.
- Suppose the Assessing Officer sees that it isn’t possible for the master of the ship to submit the amount payable before the departure. In that case, he/she has the authority to allow the shipowner to pay the requisite amount within 30 days of the departure after making necessary arrangements.
- After receiving the returns, Assessing Officer will analyse the income and determine the tax payable.
- Section 174 – Income earned by people who are leaving India permanently or for a long period of time
Section 174 of the Income Tax Act is applicable if an Assessing Officer feels that an individual might leave India in the present assessment year or thereafter.
Critical features of this Section are enumerated below:
- An individual’s income up to the date of his/her departure from India will be subjected to tax in the ongoing year itself and not in the upcoming assessment year if he/she plans to not return for a long time.
- Section 174A – Income earned by those bodies which are formed for a short period.
Section 174A of ITA is applicable for bodies that are formed for a short period.
Its important feature is given below:
- IT authorities charge tax on incomes of bodies formed for a short time in the previous year. This is because these bodies might cease to exist before the beginning of the assessment year.
- Section 175 – Income earned by people who are likely to transfer their property to avoid tax
Section 175 of ITA is applicable for people who are most likely to transfer their properties to evade tax.
Given below is its important feature:
- If the Assessing Officer feels that an individual might transfer/sell/part with their property to avoid payment of taxes, then he/she will charge tax in the previous year.
- Section 176 – Income earned from a discontinued business
Section 176 of the Income Tax Act is for charging tax on incomes of discontinued businesses.
Its essential feature is enumerated below:
- As per this Section, the Assessing Officer can collect the taxable amount on incomes earned from a discontinued business in the previous year itself.
- However, the Assessing Officer has the freedom to analyse and decide whether the tax will be charged in the previous year or the assessment year.
Also Read: Tax Relief Under Section 87A Of Income Tax Act: How To Claim Tax Rebate Under Section 87A
Final Word
The previous year in Income Tax is an essential concept that every individual should be aware of. Income earned in the previous year is taxable during the assessment year. The Indian government has carefully formulated the rules and guidelines of the Income Tax Act to promote transparency and curb tax evasion and avoid penalties.
FAQs on Previous Year
Ans: Section 80C of ITA enables the reduction of taxable income. As per this Section, people who have invested in PPF, EPF, LIC, NSC, SCSS, infrastructure bonds, tax-saving FDs, etc., can claim tax deductions. Additionally, one can avail of a tax deduction for expenses related to the principal amount payable for home loans, stamp duties and registration charges for buying properties.
Ans: There are many ways one can reduce taxes on income. Some of them are as follows:
Investments in Municipal Bonds
Beginning of a side-business
Buying health insurance plans
Investments in mutual funds (ELSS) and real estate
Ans: The National Pension Scheme (NPS), is a low-risk investment plan for retirement. It has many associated tax benefits. For example, employees can claim a tax deduction for 10% of the NPS contribution. In addition, self-employed taxpayers can claim deductions of up to 20% of their gross income or Rs. 1.5 lakh, whichever would be lower.
Ans: There are many tax saving options mentioned in different IT Act sections apart from Section 80C. According to Section 80D of ITA, one can seek deductions for payment of medical insurance premiums. According to Section 80EE, individuals can claim tax deductions for interest paid on home loans.
Ans: Income Tax Act enables many tax benefits for senior citizens. The money that elderly parents receive as gifts from their children is tax-free. They can invest this money through various schemes which provide tax benefits. However, your parents should have a lower income.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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