‘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.
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.
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.
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).
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 |
Given below are exceptions for taxation of income earned in the previous year:
Section 172 of the Income Tax Act has incorporated guidelines for a Non-Resident Indian’s shipping business.
Given below are its important features:
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:
Section 174A of ITA is applicable for bodies that are formed for a short period.
Its important feature is given below:
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:
Section 176 of the Income Tax Act is for charging tax on incomes of discontinued businesses.
Its essential feature is enumerated below:
Also Read: Tax Relief Under Section 87A Of Income Tax Act: How To Claim Tax Rebate Under Section 87A
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.
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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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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.