“The Income of the Previous Year is Taxed in the Current Year” – Explained
In the Indian Income Tax system, income is taxed not in the year it is earned, but in the following year. This concept is based on the principles of the Income Tax Act, 1961 and is important for understanding how tax is calculated and paid.
Meaning of Previous Year and Assessment Year
- Previous Year: This is the financial year in which the income is earned. It runs from 1st April to 31st March of the next year.
- Assessment Year: This is the year following the previous year, in which the income is assessed and taxed.
Example: If you earn income from 1st April 2023 to 31st March 2024, that period is the “Previous Year 2023-24”. The income earned during this period will be taxed in the “Assessment Year 2024-25”.
Why is Income Taxed in the Next Year?
- Accurate Calculation: It allows time to calculate total income, claim deductions, and prepare financial statements.
- Return Filing: Taxpayers need time to file Income Tax Returns (ITR) with correct data.
- Assessment: The Income Tax Department assesses the return during the Assessment Year and verifies if the tax paid is correct.
Exceptions to the Rule
In certain cases, income is taxed in the same year in which it is earned:
- Income of a person leaving India permanently
- Income of a person who dies in the same year
- Income of a discontinued business
Conclusion
The rule that “income of the previous year is taxed in the current year” helps both taxpayers and tax authorities manage tax collection in an orderly and fair manner. It gives enough time for proper accounting and ensures that taxes are paid accurately.