New Income-Tax Bill to replace 'assessment year' with 'tax year’ , make compliance easier

Finance minister Nirmala Sitharaman promised a simpler tax regime in Budget 2025

The Income-Tax Bill, 2025, likely to be introduced in Parliament on February 13, has several changes that will simplify compliance, as finance minister Nirmala Sitharaman promised while tabling Budget 2025.

The bill proposes to introduce the concept of "tax year", doing away with "assessment year”, sources said. The tax year, like the financial year, will be the 12-month period from April 1 to March 31, simplifying compliance and reporting requirements.

The Income-Tax Act, of 1961, uses "assessment year" and "previous year" for filing returns.

In the new bill, 2025, the tax year refers to the period during which income is earned and reported for taxation purposes. This change ensures that the terminology is consistent with the financial year.

Also read: New Income Tax Bill to tax winnings of online games with a clearer definition

The Income-Tax Act, of 1961, follows a two-layered concept of the previous year – the year in which income is earned – and assessment year – the year following the previous year during which the previous year's income is assessed and taxed.

For example, income earned between April 1, 2024, and March 31, 2025, would be assessed in the Assessment Year 2025–26. In the new system, this period will be referred to as the Tax Year 2024–25, eliminating confusion.

“The new tax bill aims to make the system simpler and more modern. The plan uses easier-to-understand terms like Tax Year instead of Assessment Year, defines Tax Year as the 12 months starting April 1…,” Ritika Nayyar, Partner, Singhania & Co, told Moneycontrol.

It also updates rules for digital transactions and cryptocurrencies, she said.

A taxpayer's charter is also proposed to make things more transparent and protect taxpayers. “These changes could make taxes easier to file, less complicated, and more open. Businesses, especially those dealing with digital money, could be affected. This is a big effort to update India's direct tax system but we'll have to wait and see how it works out,” Nayyar said.

The introduction of the tax year aims to simplify laws and enhance taxpayer convenience. The older terms created unnecessary complexity, especially for first-time taxpayers.

By aligning the tax period with the financial year and removing redundant terminology, the new bill aims to reduce errors in filing and improve compliance, she added.

Impact on tax filings

Taxpayers will no longer need to differentiate between previous and assessment years. The tax year will directly correspond to the period in which income is earned and reported.

Financial records will align seamlessly with the tax year, reducing confusion while filing tax returns and preparing documents.