Tax Year vs Assessment Year vs Financial Year: Key Differences Explained

Introduction

‍

Finance Minister Nirmala Sitharaman introduced the Simplified Income Tax Bill 2025 in Lok Sabha on February 13th. She had initially made the announcement during the Union Budget 2025 session. 

‍

The new bill proposes to reduce the complexity of legal terms and make it easier for taxpayers to understand the taxation process.

‍

Among other changes, the bill is set to replace terms like “assessment year” and “previous year” with “tax year.” The term “financial year” will continue to mean the same as under the Income Tax Act of 1961. 

‍

What is a Tax Year?

‍

Under the New Income Tax Bill 2025, the “tax year” (TY) is defined as the 12-month period that begins on April 1st and ends on March 31st. This is similar to the “financial year” (FY) under the Income Tax Act of 1961. 

‍

It is defined in the bill as, 

"For the purposes of this Act, 'tax year' means the 12 months period of the financial year commencing on the 1st April.”

‍

This means that the tax year for salaried employees would be the same as the financial year. For example, the tax year for income earned in the financial year 2025-26 will be TY 2025-26. 

‍

For business and professional purposes, the tax year will begin from the date of the establishment of such a business and profession and end on March 31st, the same as the financial year. 

‍

What is a Financial Year?

‍

“Financial Year” has been defined as a period of 12 months starting on April 1st and ending on March 31st next year. The income earned during the financial year becomes taxable during the tax year. 

‍

For example, an individual earning income in FY 2024-25 will file his/her income tax in the tax year (TY) 2025-26, earlier referred to as the assessment year. 

‍

What is an Assessment Year?

‍

The assessment year under income tax is the year in which the income earned in the financial year is assessed or taxed. The New Income Tax Bill 2025 is replacing the term “assessment year” with “tax year” to simplify the law for taxpayers. 

‍

Key Differences Between Tax Year, Financial Year, and Assessment Year

‍

Check out the key differences between the tax year, financial year, and assessment year under the Income Tax Act of 1961 and the newly proposed Income Tax Bill 2025.

‍

‍

Why Are These Terms Important for Taxpayers?

‍

The introduction of the “tax year” is aimed at making the tax filing process less tedious and taxation laws more comprehensible for taxpayers. 

‍

Understanding the meaning behind these taxation terminologies will help taxpayers navigate their tax filing process quicker and easier. 

‍

The simplification of language will further make the tax filing process less intimidating and save time.