Section 3 of Income Tax Act 1961

Section 3 of Income Tax Act 1961, defines the “previous year” for income tax purposes. It specifies the duration and starting date of the financial year in which the income is earned, which is used as the basis for calculating taxable income.

The “previous year” refers to the financial year in which income is earned. It starts on April 1 and ends on March 31 of the following calendar year. For example, for the assessment year 2024-25, the previous year would be April 1, 2023, to March 31, 2024.

The concept of the “previous year” is important because the income earned during this period is assessed for tax in the subsequent “assessment year.” It sets the timeline for reporting and filing income tax returns.

An “assessment year” is the period immediately following the “previous year” in which the income earned during the previous year is assessed and taxed. For example, income earned in the previous year 2023-24 is assessed in the assessment year 2024-25.

Generally, the “previous year” is uniform for all taxpayers and types of income. However, in specific cases such as new businesses or professions starting operations for the first time, the “previous year” may be different and begin from the date of commencement until the next March 31.

For a newly established business or profession, the first “previous year” starts from the date of commencement of operations and ends on the following March 31. For example, if a business starts on November 1, 2023, the first “previous year” would be November 1, 2023, to March 31, 2024.

Generally, the financial year from April 1 to March 31 applies uniformly. However, certain exceptions may apply in cases such as newly incorporated companies or entities that are amalgamated or merged, where their “previous year” may start from a specific date other than April 1.

If income spans multiple “previous years,” it is assessed separately for each year in which the income is accrued or received. The income for each period is declared in its corresponding assessment year.

Section 3 determines the financial year during which income is reported. Taxpayers must report the income earned in the “previous year” while filing their tax returns for the corresponding “assessment year.”

While the specific term “previous year” is a feature of the Indian Income Tax Act, the concept of defining a financial or tax year for income reporting purposes is common globally. However, the actual duration and terminology may differ from country to country.

If a taxpayer fails to file a return for income earned during the “previous year,” penalties may be imposed under different sections of the Income Tax Act, such as late fees under Section 234F or additional interest for delayed payment under Section 234A and 234B.

No, for most taxpayers, the “previous year” follows the fixed financial year of April 1 to March 31. However, as mentioned earlier, new businesses or special cases might have a different starting date for their first “previous year.”

Section 3 applies uniformly across all sources of income, whether salary, business or professional income, capital gains, or other sources. The income earned from any of these sources during the “previous year” is consolidated and assessed in the relevant “assessment year.”

In India, individuals and most businesses are required to follow the standard financial year (April 1 to March 31). A change in financial year is not permitted for tax purposes unless specified under special provisions or circumstances involving businesses or entities restructuring, such as mergers and acquisitions. In such cases, the income may be assessed based on the specific period defined by the tax authorities.

Yes, deductions and exemptions under various sections of the Income Tax Act, such as Section 80C (investments), Section 24(b) (interest on home loans), and others, are claimed based on income earned and documented expenses or investments made during the “previous year.”

Section 3 affects advance tax calculations as it determines the period in which income is earned. Taxpayers whose total tax liability exceeds ₹10,000 are required to pay advance tax in installments during the “previous year,” based on estimated income. This ensures that tax is paid in the year the income is generated, not deferred until the “assessment year.”

Income earned abroad during the “previous year” by an Indian resident is subject to tax in India and must be reported in the income tax return. Depending on double taxation avoidance agreements (DTAA) between India and the foreign country, relief or credit for taxes paid abroad may be available.

For a newly incorporated company, the “previous year” starts from the date of incorporation and ends on the following March 31. The company must report any income earned during this period when filing its return for the corresponding “assessment year.”

If an individual’s residential status changes (e.g., from resident to non-resident or vice versa) during the “previous year,” income tax laws will apply based on the individual’s status at the time the income is earned. A resident is taxed on global income, while a non-resident is only taxed on income accrued or received in India.

While agricultural income is exempt under Section 10(1), it must be included for rate purposes when calculating tax on non-agricultural income if the total agricultural income exceeds a certain limit. The “previous year” concept applies here to determine when this income is earned and assess tax accordingly.

Capital gains from the sale of assets, whether short-term or long-term, are taxed based on when the transfer of the asset occurs. The income from such transfers is included in the taxable income for the “previous year” in which the transfer takes place.

The Income Tax Department may conduct assessments or audits to verify the accuracy of income reported for the “previous year.” Taxpayers must maintain proper records and documentation to support the income, deductions, and exemptions claimed in their return.