Assessment year (Section 2(9))
Also written Assessment year · AY
The 12-month period beginning 1 April, defined by Section 2(9), in which income earned in the preceding previous year is assessed and taxed — for FY 2021-22, the assessment year is 2022-23.
In plain language
Indian tax law splits a person's financial life into two overlapping years, and getting them backwards is one of the easiest mistakes to make.
India follows the financial year — 1 April to 31 March — to calculate income. The year in which income is actually earned is called the previous year. The year that follows it, in which that income is assessed and taxed, is called the assessment year.
So if income is earned between 1 April 2021 and 31 March 2022, that period — FY 2021-22 — is the previous year. Tax on it is assessed in the following year, FY 2022-23, which is therefore Assessment Year 2022-23.
How it works
Section 2(9) defines assessment year as a period of 12 months commencing on the 1st day of April every year. Section 3 defines the previous year as the financial year immediately preceding the assessment year.
Put the two together: income of the previous year is taxed in the assessment year that follows it. A return filed "for AY 2024-25" is reporting income actually earned in the previous year, FY 2023-24.
The distinction matters beyond terminology — several provisions in the workbook are dated by assessment year, not previous year. For example, the current rules for determining an individual's residential status apply with effect from Financial Year 2020-21 (Assessment Year 2021-22), and capital gains provisions were significantly amended for transfers after 23 July 2024, which fall in Assessment Year 2025-26.
A worked example
Illustrative figures.
Mr Chandran earns a salary of Rs 14,00,000 and a capital gain of Rs 3,00,000 between 1 April 2024 and 31 March 2025.
- The period 1 April 2024 to 31 March 2025 is his previous year for this income — call it FY 2024-25.
- He files his return, and this income is assessed, in the year that follows: Assessment Year 2025-26.
He cannot be assessed on this income during FY 2024-25 itself, because the year is not yet over and the tax return process for it has not begun. The tax return he files in July 2025 — reporting income earned during FY 2024-25 — is his AY 2025-26 return, even though most people casually call it his "2024-25 tax return".
Why NISM asks about it
Chapter 7 (Concepts of Taxation), section 7.2.1 — Previous Year v/s Assessment Year — gives both the plain-language explanation and the Section 2(9) and Section 3 definitions side by side. Expect a direct definitional recall question, or a scenario giving a date of income and asking for the correct assessment year.
Common exam traps
- Previous year is when income is earned; assessment year is when it is taxed — the assessment year always comes after the previous year, never the same year.
- Both run 1 April to 31 March — only the label (previous vs assessment) and the one-year offset differ.
- "AY 2022-23" corresponds to "PY / FY 2021-22", not the other way round — a very common transposition error under exam pressure.
- Provisions that say "with effect from AY 2021-22" took effect for income earned in FY 2020-21, not FY 2021-22.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Assessee (Section 2(7))Section 2(7)'s term for a person liable to pay tax or any other sum under the Income Tax Act, and for anyone against whom a proceeding under the Act — over income, loss or refund — has been started.
- Capital asset (Section 2(14))Section 2(14)'s wide definition of what can generate a capital gain — property of any kind held by an assessee — narrowed by exclusions for stock-in-trade, personal effects and rural agricultural land.
- Cost Inflation IndexAn index notified by the CBDT each year, with 2001-02 as the base of 100, used to restate the cost of a long-term capital asset in current rupees so that inflation is not taxed as capital gain.
- Resident and Ordinarily ResidentThe residential status under which an individual's worldwide income is taxable in India — reached by being resident and failing both of the not-ordinarily-resident tests.
- CBDTThe Central Board of Direct Taxes — the body under the Ministry of Finance to which administration of the Income Tax Act is assigned, and which issues the Circulars and Notifications that interpret it.
- Previous yearUnder the Income Tax Act, 1961, the year in which income is earned. It is taxed in the following assessment year; each runs from 1 April to 31 March.
- Carry forward of lossesUsing a loss not absorbed in the current year against income of later years. For F&O losses in PMS: up to 8 assessment years, and only against business income.