Income Tax 2025

Appearance

Definition of “tax year” ​

3(1) ​

For the purposes of this Act, “tax year” means the twelve months period of the financial year commencing on the 1st April.

3(2) ​

In the case of a business or profession newly set up, or a source of income newly coming into existence in any financial year, the tax year shall be the period beginning with—

  • (a) the date of setting up of such business or profession; or
  • (b) the date on which such source of income newly comes into existence, and, ending with the said financial year.
Explanation

1. Section Summary ​

This section defines the term "tax year" for the purposes of income tax calculations. It specifies that the tax year generally aligns with the financial year (April 1 to March 31). However, for newly established businesses, professions, or newly activated income sources, the tax year begins on the date of setup or activation and ends on March 31 of that financial year.

2. Key Changes ​

  • Clarification for New Businesses/Income Sources: The section explicitly addresses how the tax year is determined for newly established businesses, professions, or income sources. This was likely implicit or addressed in other provisions under the prior income tax law but is now clearly defined in this section.
  • Alignment with Financial Year: The section reinforces the standard alignment of the tax year with the financial year (April 1 to March 31), which is consistent with prior tax laws.

3. Practical Implications ​

  • For New Businesses/Professionals: Taxpayers who start a new business or profession, or activate a new income source mid-year, will have a shorter tax year for their first year of operations. This affects how income is calculated and reported for that initial period.
  • Compliance Simplification: By clearly defining the tax year for new entities, the law reduces ambiguity and simplifies compliance for taxpayers and tax authorities.
  • Impact on Tax Calculations: Taxpayers must prorate income, deductions, and exemptions for the shorter tax year, which may require adjustments in tax planning and reporting.

4. Critical Concepts ​

  • Tax Year vs. Financial Year: While the tax year generally matches the financial year (April 1 to March 31), it can differ for new businesses or income sources.
  • Proration of Income/Deductions: For a shorter tax year, taxpayers must calculate income and deductions proportionately based on the number of months the business or income source was active.
  • Interaction with Other Laws: This definition aligns with other Indian tax laws, such as the Goods and Services Tax (GST), which also follows the financial year for most compliance purposes.

5. Compliance Steps ​

  • Determine the Start Date: Identify the exact date the business/profession was established or the income source was activated.
  • Calculate Income and Deductions: Prorate income, expenses, and deductions for the period from the start date to March 31.
  • File Returns Accordingly: Ensure tax returns reflect the shorter tax year and include all relevant financial details for the period.
  • Maintain Documentation: Keep records of the business setup date or income source activation to substantiate the tax year determination.

6. Examples ​

  • Scenario 1: A new consulting firm is established on October 1, 2023. Its tax year for 2023-24 will be from October 1, 2023, to March 31, 2024 (6 months). The firm must calculate its income and deductions for this 6-month period.
  • Scenario 2: An individual starts earning rental income from a new property on December 1, 2023. The tax year for this income source will be from December 1, 2023, to March 31, 2024 (4 months). The rental income and related expenses must be reported for this 4-month period.