Goodbye “Previous Year,” Hello “Tax Year”: Understanding India’s New Tax Law Effective April 1, 2026

India is set to introduce a major change in its income-tax law with the Income-tax Act, 2025, which received the President’s approval on 21 August 2025. This new law replaces and updates the old framework that has governed income tax in India for several decades.

Although the Act was passed in 2025, most of its important provisions will come into effect from 1 April 2026. One of the key changes under the new law is the introduction of the term “tax year”, which replaces the older terminology used in the Income-tax Act, 1961. This change aims to make the tax system easier to understand and more aligned with modern practices.

What is the “Tax Year”?

According to Section 3(1) of the new Act, the “tax year” is defined as the twelve-month period of the financial year commencing on the 1st April. This aligns the tax assessment period directly with the standard Indian financial year.

In the mapping between the old and new laws, the “tax year” now fulfills the role previously occupied by the “previous year” under the Income-tax Act, 1961. This change aims to simplify the language of the law and make it more intuitive for the average taxpayer.

In simple way A Tax Year is the complete cycle during which income is earned, assessed, and taxed under the Income-tax law.

For example:

Suppose an individual earns salary and other income during the period:

• 1 April 2026 to 31 March 2027

This period will be called the Tax Year 2026–27.

✔️ All income earned during this period will belong to Tax Year 2026–27
✔️ The Income Tax Return for this income will be filed after 31 March 2027, within the prescribed due date

Special Rules for New Businesses and Income Sources

The Act also provides clear guidelines for situations where a taxpayer does not have a full twelve months of activity. Under Section 3(2), if a business or profession is newly set up, or if a source of income newly comes into existence during a financial year, the tax year is adjusted accordingly.

In these specific instances, the tax year is defined as the period beginning with:

• The date of setting up the business or profession; or
• The date on which the source of income newly comes into existence;

This period then ends with the conclusion of that financial yea

Basis of Charge

The “tax year” serves as the fundamental unit for calculating tax liability. The law stipulates that income-tax shall be charged on the total income of every person for the tax year at the rates specified by any relevant Central Act. Unless the Act specifically provides for tax to be charged on a different period, the tax year remains the standard duration for assessment.

The Fate of PY, FY, and AY

The 2025 Act streamlines these legacy concepts into the standardized “tax year”:

• Previous Year (PY): Under the 1961 Act, “Previous Year” referred to the year in which income was earned. Section 3 of the 2025 Act explicitly replaces the “Previous Year” definition with “Tax Year”.
• Assessment Year (AY): The new Act charges income-tax on the total income of the tax year for every person. Consequently, the traditional “Assessment Year” (the year following the PY in which income was evaluated) is functionally merged into the “Tax Year” cycle for the purposes of charge and computation.
• Financial Year (FY): The “tax year” is now legally synonymous with the twelve months of the financial year.

Comparison: Income-tax Act, 1961 vs. Income-tax Act, 2025

The government is making the language more intuitive. Instead of saying “My Previous Year was 2026-27 and my Assessment Year is 2027-28,” you will simply say, “In the 2026-27 Tax Year, I earned X amount”

The introduction of Tax Year under the Income-tax Act, 2025 is a simplification reform, not an abrupt deletion of existing concepts. Taxpayers should expect a smooth transition, where familiar terms coexist for some time before fully giving way to the new system.