The amendment performed recently in the Income Tax Bill 2025 introduces major reforms in the tax-related terminologies, specifically impacting how the taxpayers and the tax authorities will perceive and compute their tax liabilities.
One of the prominent amendments is the introduction of the term tax year, which substitutes the concept of the previous year and the assessment year from the Income Tax Act 1961. The same amendment has the motive to ease the tax process and remove the confusion that emerges from the use of various terms directing distinct financial years.
Q.1 What simplification has been brought in section 2 about ‘definitions’ in the new Bill?
The below-mentioned simplifications have been performed-
- The language has been simplified wherever possible without upsetting the meaning;
- All definitions carried on to be in alphabetical order,
- Terms that were previously defined in multiple sections of the Income-tax Act of 1961 are now consolidated in section 2. For example, the definition of ‘senior citizen,’ which appeared in six different places in the 1961 Act, has now been included in section 2.
Q.2 What is meant by the word ‘Tax Year’? What is it meant to replace? Why was its introduction necessary? Why wasn’t the phrase tax year substituted with the term ‘Financial Year’?
A tax year is a 12-month period that is part of a fiscal year. It replaces the term “previous year” as used in the Income Tax Act of 1961.
With the discontinuation of the term “assessment year” in the Income Tax Bill, the term “tax year” will now be used concerning the rates of income tax. Assessments of income or total income will also be conducted for a tax year.
Confusion in the minds of the taxpayers was created from the use of the terms ‘previous year’ and ‘assessment year’ as they represented two distinct financial years.
The rationale for the use of the two terms is no longer valid in the opinion of the alignment of the previous year with the fiscal year or part of the fiscal year (in specific cases). In income tax legislation, the term ‘Tax year’ is commonly utilized in comparable tax jurisdictions.
As a tax year could be a period that is less than the financial year in specific matters, the term financial year has not been utilised at the time of doing away with the terms previous year and assessment year.
However, many measures are functioning via the tax authorities and other stakeholders while executing the tax statute, being procedural measures and compliances, like the period for filing returns, rectifications, etc, which need the reference to a financial year. In these cases, the period characterized by a financial year has more relevance. It directed that the term financial year is needed separately.
Q.3 Does the new Bill specify a financial year? Is the term “financial year” used in the Bill? If it is the same as a “tax year,” why is it still included?
The term ‘financial year is not specified in the Income-tax Bill. It is not described in the Income-tax Act of 1961, either. It is described in section 3(21) of the General Clauses Act, 1897, as the year beginning on 1st April.
In the income tax bill, the term financial year has been used. For instance, in the proposed section 21(5) of the Bill, reference has been made to a financial year for the completion certificate issued via a competent authority if a building is held as stock in trade. In these matters, the term financial year has relevance instead of the term tax year.
Q.4 Can a ‘Tax Year’ be shorter than a ‘Financial Year’?
Yes. It will take place when a business is newly set up at the time of any financial year or an income source reaches into existence at the time of a financial year. The tax year in these cases will commence from the date of setting up of the business or the income source coming into existence and finishes on the last day of that financial year.
Q.5 Will the concept of a ‘Tax Year’ clash with the concept of an ‘assessment year’ at any certain time? For instance, if the new Act comes into effect from 1st April 2026, will the tax year 2026-27 of the new Act clash with AY 2026-27 of the Income-tax Act, 1961?
No. The reasons are as follows:
- The Assessment Year 2026-27 of the Income-tax Act, 1961 will relate to the income of a taxpayer for the previous year 2025-26 instead of the income of the financial year 2026-27;
- The tax year 2026-27 of the new Act will relate to the income of a taxpayer for the FY 2026-27;
- The assessment for income of the previous year (financial year) 2025-26 of a taxpayer will be performed under the provisions of the Income-tax Act, 1961, for the assessment year 2026-27;
- The assessment for the income of the tax year (financial year) 2026-27 of a taxpayer will be accomplished under the provisions of the Bill for the tax year 2026-27.
Read Also: All Significant Changes in Income Tax Rules for FY 2024-25
Q.6 Is there any modification in the content of the charging section?
The charge of income tax was on the ‘total income’ of the ‘previous year’ of a person, in the Income Tax Act 1961. Subsequently, the income tax is levied for an assessment year at the rates or rates given via a Central Act.
In the income tax bill, in place of the term previous year, the term tax year has been utilised. Subsequently, the use of the term assessment year has been terminated. At present, the total income also relates to the tax year and the rate or rates of income tax appropriate to that tax year.
Q.7 In what way has the charging section been streamlined?
In the Income-tax Act of 1961, section 4 has two subsections and one proviso. In this section, longer sentences have been used. There are 5 sub-sections in the income tax bill elaborating on the charge of income tax in smaller and easier sentences.
Q.8 Does the Bill reference ‘Finance Companies’ and ‘Finance Units’ regarding dividends, potentially affecting financial institutions and investors?
The Income Tax Bill 2025 includes all the amendments proposed in the Finance Bill 2025. Therefore, users are advised to compare the provisions of the Income Tax Act of 1961, as updated with the proposed amendments in the Finance Bill 2025, while reviewing the Income Tax Bill 2025.
No new terms have been introduced in this bill. The Finance Bill 2025 proposes the exclusion of advances or loans between two group entities, where one entity is a finance company or a finance unit, from the definition of “dividend.” The Bill solely incorporates this proposal from the Finance Bill 2025.
