The recent changes in the Income Tax Bill 2025 introduce key reforms in tax-related terminologies, significantly impacting how taxpayers and tax authorities will perceive and calculate their tax obligations. One of the most notable changes is the introduction of the term "tax year," which replaces the concept of the "previous year" and the "assessment year" from the Income Tax Act, 1961. This change aims to simplify the tax process and eliminate confusion that arose from the use of multiple terms referencing different financial years.
QI.1 What simplification has been carried out in section 2 pertaining to 'definitions' in the new Bill?
Ans. Following simplifications have been carried out:
i. The language has been simplified wherever possible, without disturbing the meaning;
ii. All definitions continue to be in alphabetical order;
iii. Terms that have been defined at a number of places in the Income-tax Act, 1961 in the same manner have now been placed in section 2 itself. For example, the definition of 'senior citizen', which was appearing at six places in the 1961 Act, has been now placed in section 2;
QI.2 What is a 'tax year'? What does it replace? What was the need for introducing it? Why was the term 'financial year' not used in place of the term 'tax year'?
Ans. A 'tax year' is a period of twelve months contained in a financial year. It replaces the term 'previous year' used in the Income-tax Act, 1961. Further, with the discontinuance of the use of the term 'assessment year' in the Income-tax Bill, now the term 'tax year' will now be used in relation to the rate or rates of income-tax also. In addition, any assessment of the income or total income will also be done for a 'tax year'.
Use of the terms 'previous year' and 'assessment year' were creating confusion in the minds of the taxpayers as they represented two different financial years. The rationale for the use of two terms is no longer valid in view of alignment of 'previous year' with the financial year or part of the financial year (in specific cases). The term 'Tax year' is commonly used in incometax legislation in comparable tax jurisdictions.
As a tax year can be a period that is less than the financial year in certain cases, the term 'financial year' has not been used while doing away with the terms 'previous year' and 'assessment year'. However, many actions are carried out by tax authorities and other stakeholders while implementing the tax law, being procedural actions and compliances, such as time period for filing returns, rectifications etc, which require reference to a financial year. In such cases, the time period denoted by a financial year has more relevance. This means that the term 'financial year' is required separately.
QI.3 Is 'financial year' also defined in the new Bill? Has the term 'financial year' also been used in the new Bill? Why is it still appearing in the Bill if it is the same as a 'tax year?
Ans: The term 'financial year is not defined in the Income-tax Bill. It is not defined in the Income-tax Act, 1961 also. It is defined in section 3(21) of the General Clauses Act, 1897 as the year commencing on 1st April.
The term 'financial year' has been used in the Income-tax Bill. For example, in the proposed section 21(5) of the Bill, reference has been made to a financial year in relation to the completion certificate issued by a competent authority in case of a building held as stock-intrade. In such cases, the term financial year has relevance instead of the term 'tax year'.
QI.4 Can a 'tax year' be a period which is less than a 'financial year'?
Ans: Yes. This will happen when a business is newly set up during any financial year, or a source of income comes into existence during a financial year. In such cases, the tax year will begin from the date of setting up of the business or the source of income coming into existence, and end on the last day of that financial year.
QI.5 Will the concept of 'tax year' conflict with the concept of an 'assessment year' at any particular time? For example, if the new Act comes into effect from 1st April, 2026, will the tax year 2026-27 of the new Act conflict with the Assessment Year 2026-27 of the Income-tax Act, 1961?
Ans. No. The reasons are as follows:
i. The Assessment Year 2026-27 of the Income-tax Act, 1961 will pertain to the income of a taxpayer for the previous year 2025-26 and not to the income of the financial year 2026-27;
ii. The tax year 2026-27 of the new Act will pertain to the income of a taxpayer for the financial year 2026-27;
iii. The assessment for income of the previous year (financial year) 2025-26 of a taxpayer shall be done as per the provisions of the Income-tax Act, 1961 for the assessment year 2026-27;
iv. The assessment for income of tax year (financial year) 2026-27 of a taxpayer shall be done as per the provisions of the Bill for tax year 2026-27.
QI.6 Is there any change in the content of the charging section?
Ans. In the Income-tax Act, 1961, the charge of income-tax was on 'total income' of the 'previous year' of a person. Further, income-tax is charged for an 'assessment year' at the rate or rates provided by a Central Act. In the Income-tax Bill, in place of the term 'previous year', the term 'tax year' has been used. Further, the use of term 'assessment year' has been discontinued. Now, the total income also pertains to a 'tax year' and the rate or rates of income tax also pertain to that 'tax year.'
QI.7 In what way has the charging section been simplified?
Ans. In the Income-tax Act, 1961, section 4 has two sub-sections and one proviso. Long sentences have been used in the section. In the Income-tax Bill, there are five sub-sections, explaining the charge of income-tax in smaller and simpler sentences.
QI.8 Whether the Bill has introduced references to 'Finance Companies' and 'Finance Units' in the context of dividends, which could have implications for financial institutions and investors?
Ans: The Income Tax Bill 2025 also contains all amendments proposed in Finance Bill 2025. Therefore, the users are advised to compare the provisions of the Income Tax Act, 1961, as updated with proposed amendments in Finance bill 2025, while reading the Income Tax Bill, 2025. Therefore, no such additional term has been introduced in the Bill. Finance Bill 2025 has proposed exclusion of advance or loans between two group entities where one of the entities is "Finance Company" or a "Finance Unit", from the definition of the term 'dividend'. The Bill only incorporates the proposal made in the Finance Bill, 2025.
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