Tax Year vs Assessment Year: how the new system works

Under the Income-tax Act, 1961, income was earned in the previous year (PY) and taxed in the following assessment year (AY). Salary for April 2025 to March 2026 belonged to PY 2025-26 and was assessed in AY 2026-27. This two-year label confused taxpayers for decades – people often paid challans or filed returns for the wrong year.

The Income-tax Act, 2025 removes both terms and uses one concept: the Tax Year.

What the law says

Under the 2025 Act, "tax year" means the 12-month financial year beginning on 1 April. Where a business or profession is newly set up, or a new source of income comes into existence during the year, the first tax year starts on that date and ends on the following 31 March. Tax for a tax year is charged on the income of that same year – there is no separate year of assessment.

For transition, the Act reads any reference to a tax year before 1 April 2026 as the corresponding previous year. So "tax year 2024-25" means previous year 2024-25, i.e. AY 2025-26.

Old and new labels side by side

The cleanest way to remember: AY 2026-27 is the last assessment year. Everything after it is a Tax Year.

Where you will see the change

• Advance tax challans for income earned from April 2026 are for Tax Year 2026-27. The September and December 2026 instalments are under the 2025 Act – see our advance tax guide.
• TDS statements and certificates – Form 130 (formerly Form 16) issued in 2027 will relate to Tax Year 2026-27.
• Returns – the first return under the new Act will be for Tax Year 2026-27, filed by 31 July / 31 August / 31 October 2027 depending on the category.
• Notices – a notice in 2026 about income of FY 2023-24 will still speak of AY 2024-25 and the 1961 Act.

Worked example: a salaried taxpayer in Rohini

Example: Ms Kaur earns salary throughout and sells mutual fund units in February 2026 and again in August 2026.

Ms Kaur should check that the advance tax challan for the August 2026 gain says Tax Year 2026-27 – not AY 2026-27, which is the earlier year.

Short tax years

The new definition matters most for new businesses. A proprietor who starts trading on 1 October 2026 has a first tax year of six months (1 October 2026 to 31 March 2027). Thresholds expressed per year – such as the presumptive limits and TDS thresholds – apply to that tax year. For a newly incorporated company, the same principle applies from the date of incorporation.

What has not changed

• Books of account, GST returns and company financial statements continue on the April–March financial year.
• Slab rates, rebate and deductions were carried over unchanged – see tax slabs for Tax Year 2026-27.
• Time limits for old years (belated returns, rectification, reassessment) continue under the 1961 Act through the savings clause.

Common mistakes to avoid

• Paying self-assessment tax for FY 2025-26 under "Tax Year 2026-27" – the credit lands in the wrong year. If it happens, the challan year can be corrected through the assessing officer or the challan correction facility within time limits.
• Writing "AY 2027-28" on documents for income of 2026-27. The correct term is Tax Year 2026-27.
• Assuming a notice dated after April 2026 is under the new Act. Read the year it relates to.

Key takeaway

Use AY only for years up to AY 2026-27 and Tax Year from 2026-27 onwards. When in doubt, write both: "income of FY 2026-27 (Tax Year 2026-27)". Our Law Library shows the section to quote for each year.