It’s that time of the year again when we all gather our financial documents and start preparing for income tax filing. However, before you dive into the process, it’s important to understand some key terms such as Previous Year and Assessment Year.
The Previous Year refers to the financial year that immediately precedes the assessment Year for taxation purposes. While assessment Year is the year in which the income earned during the Previous Year is evaluated, assessed, and taxed accordingly.
Previous vs. Assessment Year
|Previous Year||Assessment Year|
|The previous year refers to the financial year immediately preceding the assessment year. It is the year in which the income is earned and transactions take place.||The assessment year is the year following the previous year, during which the income earned in the previous year is assessed for tax purposes by the relevant tax authorities.|
|It covers the duration of one financial year, typically from April 1 to March 31. It represents the period in which the income is generated and expenses are incurred.||It coincides with the calendar year immediately following the previous year. It is the period during which the taxpayer’s income is evaluated, and tax liability is determined based on the income earned in the previous year.|
|In the previous year the Income earned is reported in the income tax return filed for that year. The previous year’s income is assessed and taxed in the subsequent assessment year.||The assessment year is when the tax authorities review the income tax return filed by the taxpayer for the previous year and determine the tax liability for that year.|
|Its deadline for filing the income tax return for the previous year is usually before the end of the assessment year, with specific dates varying across jurisdictions and tax regulations.||It has its own specified deadline for filing the income tax return and paying any outstanding tax liabilities determined for the previous year. The filing deadlines may differ from the previous year’s filing deadlines.|
|The previous year is crucial for taxpayers to maintain accurate financial records, report income, claim deductions, and comply with tax obligations during the assessment year. It sets the basis for tax assessment and payment in the subsequent assessment year.||The assessment year is significant for taxpayers as it determines their tax liability based on the income earned and reported in the previous year. It is the period when taxpayers fulfill their tax obligations, including filing returns, making tax payments, and responding to any inquiries or audits by the tax authorities.|
What is the previous year?
The Previous Year refers to the financial year immediately preceding the Assessment Year for taxation purposes. It is the year in which income is earned and assessed for taxation. For example, if the Assessment Year is 2023-2024, then the Previous Year would be 2022-2023.
During the Previous Year, individuals and entities generate income through various sources, and this income is taken into account for taxation in the subsequent Assessment Year. It is important for taxpayers to accurately report and document their income earned during the Previous Year when filing their tax returns.
What is the assessment year?
The Assessment Year is the financial year in which the income earned during the Previous Year is evaluated, assessed, and subjected to taxation. It is the year following the Previous Year in which taxpayers file their income tax returns.
For example, if the Previous Year is 2022-2023, then the Assessment Year would be 2023-2024. During the Assessment Year, taxpayers calculate their tax liability based on the income generated in the Previous Year and fulfill their tax obligations by filing their tax returns. It is during this period that the tax authorities review and assess the income, deductions, and tax payments of the taxpayers.
Pros and cons of previous and assessment year
Pros of Previous Year:
- Clear timeline: The concept of the previous year provides a defined timeframe for assessing income and determining tax liabilities.
- Accurate income reporting: It ensures that income earned in a specific period is correctly reported, leading to more accurate tax calculations.
- Allows tax planning: Individuals and businesses can plan their financial activities and investments based on the previous year’s income to optimize tax benefits.
- Consistency: The previous year’s concept provides consistency in tax assessment across different individuals and entities.
Cons of Previous Year:
- Delayed tax assessment: The time lag between the end of the previous year and the assessment year may lead to delays in tax assessments and refunds.
- Limited flexibility: Tax liabilities are based on the income earned during the previous year, which may not reflect the current financial situation of individuals or businesses.
- Inability to account for changes: Significant changes in income or financial circumstances between the previous year and the assessment year may not be adequately addressed.
Pros of Assessment Year:
- Current tax assessment: The assessment year considers the current financial year’s income, providing a more up-to-date evaluation of tax liabilities.
- Flexibility: Changes in income, deductions, or exemptions within the assessment year can be considered, allowing adjustments in tax calculations accordingly.
- Timely tax filing: The assessment year provides a specific timeframe for individuals and businesses to file their tax returns, ensuring timely compliance.
Cons of Assessment Year:
- Potential uncertainties: The assessment year’s tax liabilities may not be known until the end of the financial year, creating uncertainties for tax planning and budgeting.
- Increased complexity: The assessment year requires individuals and businesses to track and report current income accurately, making tax calculations more complex.
Applicability of previous and assessment year to income tax filing
The previous year is the financial year in which you have earned the income. The assessment year is the financial year in which you file your income tax return.
Income earned in the previous year (say Financial Year 2019-20) can be taxed in the assessment year (2020-21). So, if you are filing your income tax return for 2020-21, then the incomes which are to be taken into consideration are those which were earned between 1st April 2019 to 31st March 2020.
However, there are certain incomes that can be taxed in the assessment year immediately following the previous year in which they are earned. These incomes are called current incomes and they include interest from bank deposits, dividends, etc.
Key differences between previous and assessment year
- The previous year represents the year in which income is earned, while Assessment Year represents the year in which income is assessed for taxation.
- The Previous Year determines the scope of income for taxation, whereas the Assessment Year determines the tax liability based on the income earned in the Previous Year.
- The Previous Year ends on 31st March, while the Assessment Year begins on 1st April and ends on 31st March.
- Income is earned during the Previous Year, whereas income is assessed and taxed in the Assessment Year.
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The Previous Year represents the year of income generation, while the Assessment Year represents the year of income assessment for taxation. The Previous Year determines the scope of income and sets the foundation for the tax calculation in the Assessment Year. Taxpayers need to maintain records of income earned during the Previous Year and fulfill their tax obligations in the Assessment Year.