In Income Tax Law, the term “Previous Year” holds a crucial place. It refers to the financial year immediately preceding the assessment year in which the income of a taxpayer is earned. In simple terms, the previous year is the 12-month period (generally from 1st April to 31st March) during which income is generated, and tax liability is calculated in the next year (Assessment Year). This concept ensures a systematic approach where income is first earned, recorded, and then assessed for taxation in the following year. Understanding the “Previous Year” is essential, as it forms the foundation for determining taxable income, filing returns, and complying with all tax provisions under the Income Tax Act, 1961.
For the purposes of this Act, "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, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.