The new Income Tax Act, 2025, is replacing ‘Assessment Year’ with ‘Tax Year.’ This will allow tax filing and assessment to occur in the same year. Learn how this change will impact taxpayers.
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The language of income tax laws has always been somewhat complex for ordinary taxpayers. Terms like Financial Year, Previous Year, and Assessment Year have been particularly confusing when filing ITRs. To address this confusion, the government has made a major change in the new Income Tax Act, 2025.
What does the new Income Tax Act, 2025, say?
The new Income Tax Act will come into effect on April 1, 2026. Under this law, a new concept of ‘Tax Year’ is being introduced. This will replace both ‘Previous Year’ and ‘Assessment Year.’ The government’s aim is to make tax filing and tax assessment easier and more understandable.
How did the tax system work until now?
Under the current system, i.e., the Income Tax Act, 1961, the year in which income was earned was called the Financial Year. However, tax on that income was assessed in the following year, which was called the Assessment Year.
For example, income earned in FY 2024-25 was shown and assessed in AY 2025-26. This system of two different years was the biggest cause of confusion, because income was calculated for one year and tax was calculated for the next year.
What changes will be seen in ITR filing?
The new law eliminates the dual system of financial year and assessment year. Income reporting and tax assessment will now be done in the same year as income is earned. This means the tax year will be the same as the year in which the income was earned.
Under the new system, income earned in any year will be reported and assessed in the same tax year. This will make it clear to taxpayers which year they are filing their ITR for. It’s important to note that this change is only procedural. There are no changes to tax slabs or tax rates.
What will be its impact on the 2025-26 ITR?
The tax year system will be implemented from April 1, 2026. Its full impact will be visible in tax filings from 2026-27. However, taxpayers will still need to keep this change in mind when filing their ITR for 2025-26.
In the future, the term “Tax Year” will replace “Assessment Year” in ITR forms, tax notices, assessment orders, and compliance documents. All tax-related communication will become simpler and more straightforward.
This has a direct impact on the average taxpayer.
Simply put, the “income one year, tax the next” problem will be eliminated. Tax filing and assessment will be done in the same year as the income is earned. This change will make the system easier and more user-friendly, especially for first-time taxpayers.
This government move is considered a significant initiative towards simplifying tax compliance and creating a more clear and understandable tax system for taxpayers.
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