# Previous Year and Assessment Year

Income tax follows a two-year cycle: income is earned in one year and taxed in the next.

## For the current exams (May 26 / Sep 26 / Jan 27)

Previous Year (P.Y.) = 2025–2026
Assessment Year (A.Y.) = 2026–2027

## Assessment Year [Section 2(9)]

A period of 12 months beginning on 1st April every year.
The income of the previous year is taxed in the immediately following assessment year.
Example: income earned in P.Y. 2025-26 is taxed in A.Y. 2026-27.

## Previous Year [Section 3]

The financial year immediately preceding the assessment year.
Always ends on 31st March.
For a newly set-up business/profession or a new source of income, the previous year begins on the date of setting up and ends on the following 31st March (so the first previous year can be shorter than 12 months).

## Key takeaways

Previous year always ends 31 March; only the start date can vary (for new businesses).
The general rule: earn in PY → pay tax in the following AY. (Certain exceptions tax income in the PY itself — covered separately.)

Worked example

### Example 1

Q. For A.Y. 2026-27, A has been running a business since 1993. Determine the previous year.

A. Since the business is already established, the previous year is the full financial year: 1.4.2025 to 31.3.2026.

### Example 2

Q. A chartered accountant sets up his profession on 1st July 2025. Determine the previous year for A.Y. 2026-27.

A. For a newly set-up profession, the previous year starts on the date of setting up: 1.7.2025 to 31.3.2026 (a period shorter than 12 months).

⚠️ Common exam mistakes

Taking a full 12-month previous year for a newly set-up business — the first PY runs from the date of setting up to the following 31st March.
Confusing the AY and PY: income is EARNED in the PY and TAXED in the following AY.
Letting the previous year end on a date other than 31st March — it always ends 31 March regardless of when it began.

Bare-Act text Section 2(9) and Section 3 · Income-tax Act, 1961 · click to expand

Section 2(9): "assessment year" means the period of twelve months commencing on the 1st day of April every year. Section 3: "previous year" means the financial year immediately preceding the assessment year; provided that in the case of a business or profession newly set up, or a source of income newly coming into existence, the previous year shall be the period beginning with the date of setting up of the business or profession (or the date the source comes into existence) and ending with the said financial year.

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Previous Year and Assessment Year [Sec 2(9) & Sec 3]

Worked example

⚠️ Common exam mistakes