Of everything the Income-tax Act, 2025 does, the change most people will notice first is the smallest one to describe. Two familiar terms have gone. In their place there is one.
For sixty years Indian tax law asked taxpayers to hold two years in their head at the same time: the year in which income was earned, and the year in which it was taxed. From 1 April 2026 there is a single reference point — the tax year.
The change is not merely linguistic. It touches the way returns are labelled, the way notices are described, the way TDS periods are stated, and, for one filing season, the way a taxpayer selects the correct year on the e-filing portal.
The problem the change solves
Under the Income-tax Act, 1961, income earned between 1 April 2024 and 31 March 2025 belonged to the previous year 2024-25. It was assessed in the assessment year 2025-26. Both years appeared in the same conversation, and they were always one apart.
This produced a steady stream of avoidable errors. Taxpayers selected assessment year 2024-25 on the portal when they meant to report income of the financial year 2024-25. Challans were deposited against the wrong year. Advance tax was credited to a year the taxpayer had not intended. Replies to notices cited the year of earning where the notice referred to the year of assessment. Every practitioner has spent time unwinding a payment sitting against the wrong assessment year.
The distinction had a historical rationale. It had ceased to have a practical one.
What section 3 provides
Section 3 of the Income-tax Act, 2025 defines the tax year. It is the twelve-month period of the financial year, beginning on 1 April. For a business or profession newly set up, or a source of income newly coming into existence, the tax year begins on the date of setting up or coming into existence and ends with that financial year.
The consequence is that the year in which income arises and the year by reference to which it is taxed are now the same year, described by the same name. Income arising between 1 April 2026 and 31 March 2027 is income of the tax year 2026-27, and it is returned and assessed as income of the tax year 2026-27.
There is no separate assessment year in the 2025 Act. The concept has not been renamed; it has been removed.
The same facts, stated both ways
The following comparison makes the shift concrete:
| The facts | Under the 1961 Act | Under the 2025 Act |
|---|---|---|
| Salary received in June 2026 | Not applicable — the 1961 Act does not govern this period | Income of tax year 2026-27 |
| Income earned 1 April 2026 to 31 March 2027 | Would have been previous year 2026-27 | Tax year 2026-27 |
| The year it is taxed by reference to | Would have been assessment year 2027-28 | Tax year 2026-27 — the same year |
| Return filed after the year ends | ITR for AY 2027-28 | Return for tax year 2026-27 |
| Number of years a taxpayer must track | Two | One |
The arithmetic of the tax has not moved. The label has.
The one year in which both vocabularies are live
The transition creates a single period in which a taxpayer will legitimately encounter both sets of terms, and it is worth being clear about it.
Income earned in the financial year 2025-26 — that is, up to 31 March 2026 — is governed by the Income-tax Act, 1961,which was still in force when that income arose. It is returned for assessment year 2026-27, using the forms notified for that assessment year. This return is filed during 2026, after the 2025 Act has already commenced. The new statute does not change the label on it.
Income earned in the financial year 2026-27 is governed by the Income-tax Act, 2025. It is income of tax year 2026-27 and is returned after that year ends, in the new forms, during 2027.
So in 2026 a taxpayer files under the old vocabulary for old income. In 2027 the new vocabulary takes over. There is no double filing and no overlap of substance — only an overlap of terminology.
Departmental guidance on the transition makes the point that the e-filing portal will offer both year designations, and that selecting the correct one matters. A payment or a return recorded against the wrong designation is recorded under the wrong statutory framework, and correcting it later is the same tedious exercise that the reform was meant to eliminate.
Where “assessment year” is still correct
It would be a mistake to scrub the phrase from every document. Assessment year remains the correct description for anything arising under the repealed Act, and the repealed Act continues to govern a great deal for some years yet.
The saving provision in the 2025 Act preserves the 1961 Act for proceedings pending when the new Act commenced and for rights and liabilities already accrued. That means:
- A scrutiny assessment for assessment year 2024-25 remains an assessment for assessment year 2024-25.
- An appeal before the Commissioner (Appeals) or the Tribunal relating to an earlier year continues to be described by its assessment year.
- A reassessment notice issued before 1 April 2026 keeps its original character, and the proceeding is completed under the old law.
- A refund claim, a demand, or a recovery proceeding relating to an earlier year carries its assessment year with it.
In short: use “tax year” for the 2025 Act; use “assessment year” for anything that arose or was pending under the 1961 Act. Mixing the two in a single document is a common drafting error and an easy one to avoid.
Our note on responding when an income tax notice is received deals with the wider question of how the year cited in a notice frames the reply.
What to change in practice
The vocabulary change is felt across a surprising number of routine documents. A practical review would include:
Return and filing workflows. Internal checklists and calendars that describe deadlines by assessment year need a second column, or a note, for periods governed by the new Act.
Payroll and salary documentation. Employee declarations, regime elections, investment proof formats and the covering communication that accompanies Form 16 all typically recite an assessment year.
Accounting and ERP configuration. Tax year masters, deferred tax working papers and the labels used in trial-balance mapping. Software that stores a tax period by assessment year will need to accommodate a single-year designation.
Advance tax and challan records. The year selected when depositing tax is the single most common place where the old confusion caused loss. The reform reduces the risk, but only if the person making the payment knows which framework the payment belongs to.
Correspondence templates. Standard covering letters, engagement documentation and reply formats that open by reciting the year under consideration.
Board and audit committee papers. Tax provisioning notes, contingent liability disclosures and litigation schedules that identify matters by assessment year. For pending matters the assessment year label stays; for current-period provisioning the tax year label applies.
A note for those drafting documents
Contracts and internal policies that fix a reference to a statutory year age badly. A withholding clause that says “for the assessment year in which the payment falls” now needs interpretation. A clause that says “for the relevant tax period under the applicable income tax legislation in force” does not.
Where a document must name a year, the safer formulation names the period by dates — “the twelve months commencing 1 April 2026” — rather than by a statutory label that a subsequent enactment may abolish. This is a small drafting discipline that would have saved a good deal of work in the present transition, and will save it in the next one.
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