Previous year
Also written Previous year (income tax) · Previous year (Section 3)
Under 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.
In plain language
Income tax works one year behind.
You earn income during one year, called the previous year. You are taxed on it, filing your return and settling the tax, in the year that follows, called the assessment year.
Both follow the same annual cycle, 1 April to 31 March, not January to December. So the year from April 2025 to March 2026 is one previous year, and the tax on its income is assessed in the year April 2026 to March 2027.
How it works
From the booklet (Chapter 10):
- Income tax is the percentage of your income paid to the Government to fund its expenses, levied under the Income Tax Act, 1961, as amended by subsequent Finance Acts.
- It is paid by every individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), corporate firms, companies, local authorities and all other artificial juridical persons that generate income.
- Taxes are calculated on annual income, and the annual cycle starts on 1st April and ends on 31st March of the next calendar year.
- "The year in which income is earned is called the previous year and the year in which it is charged to tax is called the assessment year."
- The last date to file income tax returns for an individual is 31st July of each financial year. The booklet adds that dates and deductions are subject to change, so check the latest provisions.
Deductions such as Section 80C (life insurance, provident fund, ELSS, 5-year bank deposits, NPS Tier I, NSC, housing loan principal), 80CCD(1B) (NPS, over and above 80C), 80D (medical insurance), 80G (donations), 80TTA (savings account interest) and Section 24 (housing loan interest) are claimed against the income of the previous year.
A worked example
Salary and deduction amounts are illustrative.
Lalitha, a school administrator in Chennai, earns a salary of Rs 7,20,000 between 1 April 2025 and 31 March 2026.
- Previous year: 2025-26, the year the income was earned.
- Assessment year: 2026-27, the year it is charged to tax.
- Return due (booklet's date): 31 July in the assessment year, that is 31 July 2026.
In January 2026 she puts Rs 50,000 into a PPF account. It was invested within previous year 2025-26, so she claims it under Section 80C in the return for assessment year 2026-27.
In April 2026 she buys a health insurance policy. April 2026 falls in the next previous year (2026-27), so the Section 80D deduction goes in the return for assessment year 2027-28, not the one she files in July 2026.
The common mistake is to label everything with the calendar year. Tax years run April to March, and the label depends on whether you mean when income was earned or when it was taxed.
Why NISM asks about it
Chapter 10 (Tax Saving Options) defines previous year and assessment year, lists who pays income tax, gives the 1 April to 31 March cycle, the deductions table and the 31 July filing date. Expect a direct definition question and one that swaps the two terms.
Common exam traps
- Previous year = earned; assessment year = taxed. Swapping them is the classic wrong option.
- The tax year runs 1 April to 31 March, not January to December.
- The assessment year follows the previous year, it does not precede it.
- 31 July is the booklet's last date for an individual's return, and the booklet itself warns that dates are subject to change.
- HUFs, AOPs, BOIs and artificial juridical persons pay income tax too, not only individuals and companies.
- A deduction belongs to the previous year in which the payment was made.
Where this is taught
- Series XXI-B · Chapter 10: Taxationintroduced here
- Series X-B · Chapter 7: Concepts of Taxationintroduced here
- Series SEBI-ICE · Chapter 10: Tax Saving Optionsintroduced here
Related terms
- Hindu Undivided FamilyAn HUF is taxed as its own person under the Income Tax Act — and, under Section 80TTA, one of only two kinds of taxpayer, with an individual, allowed the savings-account interest deduction.
- Assessment year (Section 2(9))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.
- Income taxThe tax every individual, HUF and other assessee pays on annual income under the Income Tax Act, 1961, with deductions available under sections such as 80C, 80CCD(1B), 80D, 80G, 80TTA and 24.
- Section 80CThe income-tax deduction for money put into life insurance, provident fund, ELSS, five-year bank deposits, NPS Tier 1, NSC and home-loan principal, capped in aggregate at Rs 1,50,000 a year.
- Section 80DThe income-tax deduction for medical insurance premiums paid for yourself, your spouse, your dependent children and your dependent parents — the workbook does not state a rupee ceiling.
- Section 80TTAThe deduction against tax on savings bank interest, available only to an individual or HUF, and only for a savings account with a bank, post office or cooperative bank — not for fixed deposit interest.
- Residential statusThe classification — resident (ordinarily or not ordinarily), deemed resident or non-resident — that decides which income is taxable in India. Citizenship alone is not the test.
- Tax yearUnder the Income Tax Act, 2025, the 12-month financial year beginning 1 April — or, for a newly set-up business or profession, the period from set-up to the end of that financial year.
- IncomeMoney earned from sources such as salary or wages. In the booklet it is the starting point of every budget: savings are what is left of income after expenditure.