Assessment Year (AY)

What it means

Under the Income-tax Act, 1961, two years were linked to every income. The financial year (FY), also called the previous year, is the year in which you earn the income, from 1 April to 31 March. The assessment year (AY) is the next year, when that income is reported, assessed and taxed. So income earned in FY 2025-26 is assessed in AY 2026-27.

The Income-tax Act, 2025 applies from 1 April 2026 and replaces both terms with a single tax year. The tax year is simply the financial year in which the income is earned.

How it works

• Income up to 31 March 2026: the old Act and old terms still apply. FY 2025-26 income is reported in AY 2026-27, and those returns are being filed during 2026.

• Income from 1 April 2026: the new Act applies. Income from April 2026 to March 2027 is “tax year 2026-27”, and its return is filed in 2027.

• The due dates stay linked to the year after the income is earned. Generally 31 July applies to most individuals, 31 August to non-audit business cases, and 31 October to audit cases.

• Form names also change for the new period. For example, Form 16 from the employer is now Form 130, and Form 12BB for investment declarations is now Form 124.

Example

Anil is salaried and earns ₹15,00,000 in FY 2025-26 under the new regime.

• Taxable income: ₹15,00,000 minus standard deduction of ₹75,000 = ₹14,25,000

• Tax: nil up to ₹4 lakh, ₹20,000 on ₹4 to 8 lakh, ₹40,000 on ₹8 to 12 lakh, and 15% of ₹2,25,000 = ₹33,750 on the rest

• Total: ₹93,750 plus 4% cess of ₹3,750 = ₹97,500

• This is reported in his return for AY 2026-27, due by 31 July 2026.

His salary for April 2026 to March 2027 falls in tax year 2026-27. His employer issues Form 130 for it, and he files that return in 2027.

Key points to remember

• The most common mistake is choosing the wrong year while paying tax online. A self-assessment challan paid against the wrong AY or tax year is hard to correct.

• For returns and notices relating to income up to 31 March 2026, you will still see “AY”.

• The terms change, but most familiar section names, such as 80C and 87A, are still widely used in conversation.

• Keep documents for older years. Reassessment can reach back several years under both laws.