If you are not familiar with the income tax law, then the term previous year and assessment year might be confusing. Before knowing any other provisions of income tax act, you must know what is previous year and what is assessment year, and then you will understand how income is chargeable to tax in India.
As per section 2(9), assessment year means the period of 12 months starting on the 1st day of April every year. In short, its written as AY. This means, a period of 12 months starting from 1st April 2022 to 31st march 2023 will be one assessment year 2022-23 (i.e. can be written as AY 2022-23).
Similarly, for the 12 months starting from 1st April 2023 to 31st march 2024, will be known as Assessment Year 2023-24.
As per section 2(34) and section 3, previous year means the financial year immediately preceding the assessment year. In short its written as “FY” or “PY”.
Based on the definition, for Assessment Year 2022-23, the previous year will start from 1st April 2021 to 31st March 2022. Financial year starting from 1st April 2021 to 31st March 20222 willl be considerd as FY 2021-22.
As per law, tax is levied in each assessment year with respect to or on the total income earned by the assessee in the previous year. Therefore, income earned during the financial year 2021-22 (I.e for the period starting from 1.4.2021 to 31.3.2022) will be assessed to tax in the Assessment Year 2022-23.
If assessee is maintaining books of account for the period starting from 1st January to 31st December, then for Income tax purposes they have to consider the income generated during the period starting from 1st April to 31st march instead of the period for which assessee is generally maintaining books of account. This means, for income tax purposes, accounts has to be prepared for the period 1st April to 31st March irrespective of the organisation’s accounting year.
For a newly set-up business
A newly set up business is not necessarily should start its operation from 1st April. It can commence business at any point of time.
In these type of cases, previous year should begin from the date of setting up of the business and ending on 31st March.
For example, if you have set up your business on 1.1.2022, then the first previous year will be the period starting from 1.1.2022 to 31.3.2022. The newly set up business will be assessed to tax in AY 2022-23, for the income that is generated during the period starting from 1.1.2022 and ending on 31.3.2022.
In case of a private limited company, you can find out the date of starting business from its certificate of incorporation sent to your registered email ID. You can also visit company master date maintained by Ministry of corporate affairs to know the date of incorporation. In case of a partnership firm, the date should be mentioned in the partnership deed.
When tax has to be deducted in the Previous Year
In certain cases government is asking payer to deduct tax at source (TDS) instead of waiting for the assessee to calculate and pay the net tax amount in the assessment year.
For instance, in case of salary income, employer is required to deduct tax at the applicable rate from employee’s salary income and deposit it with the government on or before the due date. In such cases, employee is not required to pay any tax in the assessment year if total tax is deducted and deposited by the employer.
Similarly in case of rent, professional fees, commission and other specified transactions, deductor is required to deduct and deposit tax with government.
Here is a list of cases where tax at the rate as specified in respected sections are to be deducted by the deductor and get it deposited against deductee’s PAN on or before the due date:
- Section 192 – TDS on salary
- Section 194I – TDS on rent
- Section 194H – TDS on commission
- Section 194J – TDS on professional and Technical fees
- Section 194A – TDS on Bank interest
- Section 194B and 194BB – TDS on winnings from lotteries, games, horse races and card games etc.
- Section 194C – TDS on contractor or sub contractor.
Assessee is only required to file its annual income tax return as specified by the government on or before the due date if tax liability is nil or else they have to pay the net tax liability before filing tax return.
