Important Differences Between Previous Year and Assessment Year

Previous Year

Previous Year (PY) refers to the financial year immediately preceding the assessment year (AY) for which the income of a person is evaluated for tax purposes. In other words, the PY is the year in which an individual, HUF, firm, company, or any other entity earns income that is taxable in the subsequent AY.

For example, for the AY 2022-23, the PY would be the financial year from

It is important to note that the PY can be shorter than 12 months in certain cases, such as when a business or profession is newly set up or when a source of income commences in a particular financial year. In such cases, the PY would start from the date of the commencement of the business or income source and end on March 31 of that financial year.

The PY is a crucial period for taxpayers as it determines the income that is taxable in the subsequent AY. Therefore, taxpayers must keep accurate records of their income, deductions, and expenses during this period to file an accurate income tax return for the subsequent AY.

Examples of Previous Year

Here are a few examples of previous year:

Mr. X is a salaried employee who earns a salary of Rs. 5 lakhs per annum during the financial year 2021-22. The previous year for Mr. X would be the same period, i.e., April 1, 2021, to March 31, 2022.

ABC Pvt. Ltd. is a company that runs a restaurant business. The company earns a total revenue of Rs. 50 lakhs during the financial year 2021-22. Therefore, the previous year for ABC Pvt. Ltd. would be the same period, i.e., April 1, 2021, to March 31, 2022.

Ms. Y is a freelance graphic designer who starts her business on September 1, 2021, and earns a total income of Rs. 3 lakhs until March 31, 2022. In this case, the previous year would begin on September 1, 2021, and end on March 31, 2022.

XYZ HUF is a Hindu Undivided Family that earns a total income of Rs. 8 lakhs during the financial year 2021-22. The previous year for XYZ HUF would be the same period, i.e., April 1, 2021, to March 31, 2022.

Instances of Previous Year

The Income Tax Act, 1961, provides for certain instances when the income of the previous year is assessed in the same year. These are:

• Shipping business of a non-resident: If a non-resident earns income from a shipping business that carries passengers, livestock, goods, or mail between India and any foreign port, the income will be deemed to accrue or arise in India. The income from such shipping business will be assessed in the same year in which it is earned, even if the non-resident has not filed a tax return.
• Person leaving India, permanently having no intention of coming back: If a person leaves India for good and has no intention of returning, their income earned in the previous year will be assessed in the same year.
• Association of persons, body of individuals, or any artificial juridical person established for a definite objective: If an association of persons (AOP), body of individuals (BOI), or any artificial juridical person (AJP) is established for a specific objective and dissolves or is discontinued, the income earned during the previous year will be assessed in the same year.
• Discontinued business: If a business is discontinued during the previous year, the income earned up to the date of discontinuation will be assessed in the same year.
• Person likely to transfer, sell or dispose of assets to avoid the payment of taxes: If the assessing officer has reason to believe that a person is likely to transfer, sell or dispose of assets to avoid the payment of taxes, the income earned during the previous year will be assessed in the same year.

Assessment Year

Assessment Year is the year in which the income earned during the Previous Year is assessed or evaluated for tax purposes. The term “assessment year” has been defined under section 2(9) of the Income Tax Act, 1961, as a period of 12 months commencing on the 1st day of April every year.

For instance, if a taxpayer earns income during the Financial Year 2021-22, the Previous Year will be 2021-22, and the Assessment Year will be 2022-23. During the Assessment Year, the taxpayer is required to file their income tax return, and the income tax department will assess their income, deductions, and tax liability based on the income earned in the Previous Year.

In other words, the Assessment Year is the year in which the taxpayer’s tax liability is determined based on their income earned during the Previous Year. During the Assessment Year, the taxpayer is required to file their income tax return and pay any outstanding tax liability, if applicable.

It is important to note that the tax laws, tax rates, and tax deductions applicable during the Assessment Year may be different from those applicable during the Previous Year. Therefore, it is essential to stay updated with the latest tax laws and regulations to ensure accurate tax planning and compliance.

Examples of Assessment Year

Here are some examples of Assessment Year:

• If a taxpayer earns income during the financial year 2021-22, the Previous Year will be 2021-22, and the Assessment Year will be 2022-23.
• If a business earns income during the financial year 2020-21, the Previous Year will be 2020-21, and the Assessment Year will be 2021-22.
• If a taxpayer receives income from salary, house property, and other sources during the financial year 2022-23, the Previous Year will be 2022-23, and the Assessment Year will be 2023-24.
• If a taxpayer earns income from capital gains during the financial year 2020-21, the Previous Year will be 2020-21, and the Assessment Year will be 2021-22.

Important Difference Between Previous Year and Assessment Year

Here is a table highlighting the important features and differences between Previous Year and Assessment Year:

Key Differences Between Previous Year and Assessment Year

Here are key differences between Previous Year and Assessment Year:

1. Timing: The Previous Year is the year in which the income is earned, while the Assessment Year is the year in which the income is assessed for tax purposes.
2. Duration: The Previous Year can be a period of 12 months or less, while the Assessment Year is always a fixed period of 12 months, starting from 1st April of the relevant financial year.
3. Tax liability: The tax liability for the Previous Year is determined based on the income earned during that year, while the tax liability for the Assessment Year is determined based on the income earned during the Previous Year.
4. Filing of tax returns: The tax returns for the Previous Year are filed in the Assessment Year, while the tax returns for the Assessment Year are filed during the relevant financial year.
5. Relevant sections: The Previous Year is defined under section 3 of the Income Tax Act, 1961, while the Assessment Year is defined under section 2(9) of the same Act.
6. Purpose: The purpose of the Previous Year is to determine the income earned during that year, while the purpose of the Assessment Year is to determine the tax liability of the taxpayer based on the income earned during the Previous Year.

Similarities Between Previous Year and Assessment Year

Although there are several differences between Previous Year and Assessment Year, there are also some similarities between them:

1. Both are related to taxation: Both Previous Year and Assessment Year are related to the taxation of income earned by an individual or entity.
2. Both are important for tax compliance: Both Previous Year and Assessment Year are important for ensuring tax compliance and filing of tax returns in a timely manner.
3. Both are defined under the Income Tax Act, 1961: The definitions of both Previous Year and Assessment Year are provided under the Income Tax Act, 1961.
4. Both are based on the financial year: Both Previous Year and Assessment Year are based on the financial year, which runs from 1st April of a year to 31st March of the following year.
5. Both impact tax liability: Both Previous Year and Assessment Year have a direct impact on the tax liability of a taxpayer, as the income earned during the Previous Year is assessed and taxed during the Assessment Year.
6. Both are necessary for tax planning: Understanding both Previous Year and Assessment Year is necessary for effective tax planning and optimizing tax liability.

Conclusion Between Previous Year and Assessment Year

In conclusion, Previous Year and Assessment Year are two important concepts related to taxation in India. While Previous Year is the year in which income is earned, Assessment Year is the year in which income is assessed and taxed.

The Previous Year may be a period of 12 months or less, while the Assessment Year is always a fixed period of 12 months starting from 1st April of the relevant financial year. The tax liability for the Previous Year is determined based on the income earned during that year, while the tax liability for the Assessment Year is determined based on the income earned during the Previous Year.

Understanding the difference between Previous Year and Assessment Year is essential for taxpayers to accurately determine their tax liability and file their tax returns within the relevant timelines. Effective tax planning involves taking into account both Previous Year and Assessment Year, in order to optimize tax liability and comply with tax regulations.