Assessment Year, Previous Year, Financial Year, Uniform Previous Year, First Previous Year in case of newly set-up business

What is an Assessment Year | Previous Year | Financial Year | Uniform Previous Year | First Previous Year in case of newly set-up business or profession or for a new source of income

ASSESSMENT YEAR [Section 2(9)]

Assessment year (AY) means the period of 12 months commencing on the 1st day of April every year. The period starting from 1st April and ending on 31st March of the next year. For instance, the assessment year 2020-21 will commence on 1st April 2020 and will end on 31st March 2021. Income of previous year (PY) of an assessee or taxpayer is taxed during the next subsequent assessment year at the rates prescribed by the relevant Finance Act.

Tax point: 

• Duration: Period of 12 months starting from 1st April.

• Relation with Previous Year (PY) It falls immediately after the Previous Year (PY).

• Purpose: Income of a previous year is assessed and taxable in the immediate following Assessment Year.

PREVIOUS YEAR [Section 4]

Previous year (PY) means the fiscal year immediately preceding the Assessment Year (AY). Income earned in a year is assessed in the next year. The year in which income is earned is known as Previous Year and the next year in which income is assessed is known as Assessment Year. It is mandatory for all assessee to follow financial year (from 1st April to 31st March) as previous year for Income-Tax purpose.

Example: 

Income earned by an individual during the previous year 2019-20 is taxable in the immediately following assessment year 2020-21 at the rates applicable for the assessment year 2020-21. Similarly, income earned during the previous year 2020-21 by a company will be taxable in the assessment year 2021-22 at the rates applicable for the assessment year 2021-22. This rule is applicable in all cases.

FINANCIAL YEAR OR FISCAL YEAR

According to Section 2(22) of the General Clauses Act, 1897, a Financial Year or Fiscal Year means the year commencing on the 1st day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st March of the next year. It plays a dual role. i.e., Assessment Year as well as Previous Year.

Example: 

Financial year 2020-21 is -

• Assessment Year for the Previous Year 2019-20; and

• Previous Year for the Assessment Year 2021-22.

UNIFORM PREVIOUS YEAR

All assessees or taxpayer are required to follow fiscal year (i.e. 1st April to 31st March) as previous year (PY). This uniform previous year (PY) has to be followed for all sources of income. However, it is not necessary that one should maintain books of account on the basis of Fiscal Year.

FIRST PREVIOUS YEAR IN CASE OF NEWLY SET-UP BUSINESS / PROFESSION OR FOR A NEW SOURCE OF INCOME

First Previous Year: The first Previous Year commencement on the date of setting up of the business / profession (or,as the case may be, the date on which the source of income newly comes into existence) and ends on the immediately following 31st March. This, in the case of a newly set-up business / profession or new source of income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12 months.

Second and subsequent Previous Year:

The second and subsequent Previous Years (PY) are always Fiscal Years. The second and subsequent Previous Years (PY) are always of 12 months each. i.e April to March.

Example: 

Ashim joins an Indian company on January 23, 2020. Prior to January 23, 2020, he is not in employment. He has no other source of income. What are the previous years for the assessment years 2020-21 and 2021-22 ?

Solution: Previous Years for the assessment years 2020-21 and 2021-22 will be-

• Assessment Year 2020-21 for the Previous Year January 23, 2020 to March 31, 2020; and
• Assessment Year 2021-22 for the Previous Year April 1, 2020 to March 31, 2021.