Ultimate Guide to the New “Tax Year” & Key Terms in India’s Income-tax Act, 2025

For decades, every taxpayer in India, from the biggest corporation to a first-time salaried employee, has had to perform a strange mental calculation.

You earned income in one year, but you paid taxes on it in another.

You had to know the difference between a “Previous Year” (PY) and an “Assessment Year” (AY). If you earned a salary from April 2024 to March 2025 (PY 2024-25), you filed your return for AY 2025-26. Get them mixed up on a form, and you were guaranteed a notice from the Income Tax Department.

It was confusing, archaic, and a barrier to compliance for millions.

Well, as of April 1, 2026, that entire system is gone.

The new Income-tax Act, 2025—the landmark legislation that finally replaces the old, amendment-riddled 1961 Act—has done away with the “Assessment Year” and “Previous Year” concepts entirely.

They have been replaced by a single, common-sense term: the “Tax Year.”

This is, without question, the single biggest change for the common taxpayer. It’s the end of a 60-year-old habit. And while the goal is simplification, the transition is causing massive confusion.

This in-depth guide is your single most important resource for navigating this new reality. We will cover everything you need to know.

This is a complete “pillar page” designed to be your one-stop reference. It’s for:

• Salaried Employees: Understand your new Form 16, how TDS will be calculated, and when to file.
• Business Owners & Freelancers: See how this impacts your accounting, invoicing, and advance tax payments.
• Investors: Learn how capital gains will be reported in this new, simpler system.
• Chartered Accountants & Tax Professionals: Use this as a reference to explain the new concepts to your clients.

We will go far beyond the “Tax Year” change. We will cover all the new key terms, definitions, and structural changes in the new Act, often called the “Direct Taxes Code” or “DTC 2025” during its drafting phase.

Your old tax knowledge is now officially obsolete. Let’s build your new foundation.

Part 1: The Old vs. The New – Why “Assessment Year” Had to Go

To understand why the “Tax Year” is such a brilliant simplification, we first need to appreciate the complicated problem it solves.

The 1 Source of Confusion: A Look Back at the 1961 Act’s System

The outgoing Income-tax Act, 1961, was built on a “look-back” principle. The entire system was based on two separate-but-linked time periods.

What Was a “Previous Year (PY)”?

This was the actual year in which you earned your income. It was the 12-month financial year running from April 1 to March 31.

• Example: You worked and received a salary from April 1, 2024, to March 31, 2025. Your “Previous Year” was PY 2024-25.
• This was the year of your economic activity.

What Was an “Assessment Year (AY)”?

This was the 12-month period following the Previous Year. It was the year in which the tax department “assessed” the income you had already earned.

• Example: For the income you earned in PY 2024-25, you would file your return and pay your final taxes in the “Assessment Year” AY 2025-26.
• This was the year of tax filing and compliance.

The “PY/AY” Problem: Why This Was a Nightmare for Taxpayers

This dual-year system was the single biggest source of non-compliance and simple human error.

1. Mental Confusion: In the middle of 2025, you were filing a tax return. On that form, you had to write “AY 2025-26.” But the income you were thinking about was from 2024. This constant mental time-travel was a nightmare.
2. Filing Errors: Millions of taxpayers would incorrectly select the Assessment Year. They’d file their 2024-earned income under “AY 2024-25” (which was wrong) instead of “AY 2025-26.” This would result in their return being processed for the wrong year, leading to automated notices, penalties, and interest.
3. Archaic Language: No other modern tax system in the world used this confusing terminology. The US, UK, Australia… they all use a simple “Tax Year.” The PY/AY system was a relic of British colonial-era accounting.
4. Barrier to “Ease of Doing Business”: For new businesses and foreign investors, this was a significant and unnecessary learning curve, adding to India’s reputation for having a complex tax code.

The government’s goal with the Income-tax Act, 2025, was simplification. And the very first thing on the chopping block was the PY/AY confusion.

The New Reality: How the “Tax Year (TY)” Solves Everything

The new Act replaces both “Previous Year” and “Assessment Year” with one logical, simple, and globally understood term.

Definition: What is a “Tax Year (TY)”?

The “Tax Year” is the 12-month period from April 1 to March 31.

That’s it. It’s the period in which you earn your income, and it’s also the period you file your return for.

Let’s look at a practical comparison.

THE CRITICAL CHANGE: A SIDE-BY-SIDE COMPARISON

Scenario	The Old, Confusing Way (1961 Act)	The New, Simple Way (Income-tax Act, 2025)
Income Earned	From April 1, 2026, to March 31, 2027	From April 1, 2026, to March 31, 2027
This Period is Called:	“Previous Year (PY) 2026-27”	“Tax Year (TY) 2026-27”
You File Your Return:	In July 2027	In July 2027
Your Return is For:	“Assessment Year (AY) 2027-28”	“Tax Year (TY) 2026-27”

This is the revolution.

When you file your return in July 2027, you will no longer be asked, “What is the Assessment Year?” You will simply select the “Tax Year” for which you are reporting income.

You earned it in TY 2026-27. You file for TY 2026-27.

The confusion is gone. The two-year headache is over. The new era is one of simple, direct reporting.

Part 2: Beyond ‘Tax Year’ – Your New Dictionary for the Income-tax Act, 2025

Understanding the “Tax Year” is the first and most important step. But the Income-tax Act, 2025 is not just a patch—it’s a complete rewrite. The architects of this new law have gone through the 1961 Act, page by page, and replaced archaic, confusing, and ambiguous terms with simpler, modern, and legally clearer definitions.

For decades, we’ve been forced to think like tax lawyers, using terms like “assessee” and “PGBP.” The new Act aims to make us think like… well, people.

This section is your new dictionary. Let’s explore the most critical key terms that have been changed, added, or eliminated, and what they mean for you.

The 5 Heads of Income: A Common-Sense Makeover

The old 1961 Act had 5 “heads” or categories of income. The new 2025 Act keeps this 5-head structure (for now), but it has renamed and clarified them for simplicity. The goal is to make it obvious where your income fits.

OLD: “Income from Salary”

NEW: “Income from Employment”

This may seem like a small change, but it’s important. “Salary” technically just refers to your basic pay. “Employment” is a much broader, more accurate term that clearly covers everything you get from your employer:

• Your base salary
• All allowances (HRA, LTA, etc.)
• Perquisites (or “perks”) like company cars or stock options
• Retirement benefits (like employer contributions to a pension)

By calling it “Income from Employment,” the new law simplifies the concept: If you get it because you are an employee, it’s taxed under this head.

OLD: “Income from Other Sources”

NEW: “Income from Residuary Sources”

This is another smart legal clarification. “Other Sources” was a lazy, vague term. “Residuary Sources” is a more precise legal term that means “this is the bucket for everything that doesn’t fit into the other four heads.”

This is still your catch-all category for things like:

• Interest from your savings account or fixed deposits
• Dividend income from stocks and mutual funds
• Winnings from lotteries or game shows
• Gifts received that are taxable

OLD: “Profits and Gains from Business or Profession” (PGBP)

NEW: (Largely Unchanged but Streamlined)

This head, often called “PGBP,” is the most complex. While the name remains similar, its internal mechanics are what’s changing. The 1961 Act had a complex list of what’s allowed as a business expense. The new Act, 2025, is moving to a simpler model that focuses more on a list of what is NOT allowed. This “disallowance-based” model is simpler to manage and aims to reduce litigation between businesses and the tax department.

(The other two heads, “Income from House Property” and “Capital Gains,” also remain, but their internal computations are the real story.)

The Big One: A New, Simplified Regime for Capital Gains

For most investors, this is the most important change after the “Tax Year.” The old capital gains system was a nightmare.

• Was it a long-term or short-term gain?
• It depended on the asset. For listed stocks, it was 12 months. For real estate, 24 months. For unlisted shares, 24 months. For debt mutual funds, 36 months.
• The tax rates were all different.
• The indexation (inflation adjustment) rules were complex.

The new Income-tax Act, 2025 tackles this complexity head-on.

Standardized Holding Periods

The new Act streamlines the holding periods to reduce confusion. While the final tables are complex, the trend is clear: the law aims to have fewer “buckets.” For example, it moves to standardize the definition of “long-term” for most classes of financial assets, making it easier for investors to know their tax liability before they sell.

Clearer Indexation and “Cost of Acquisition” Rules

The biggest source of capital gains disputes was determining the “cost of acquisition,” especially for inherited property or assets acquired before 2001. The new Act introduces clearer, formula-based rules for determining cost and a new, simplified method for applying inflation indexation, so there is less ambiguity.

The End of an Anomaly: Goodbye, “Not Ordinarily Resident (RNOR)”

This is a massive simplification for NRIs and foreign nationals. The old 1961 Act had a confusing three-tier residency system:

1. Resident (R): Taxed on global income.
2. Non-Resident (NR): Taxed only on Indian income.
3. Resident but Not Ordinarily Resident (RNOR): A complex middle status, usually for returning NRIs, where their foreign income was not taxed for a few years.

This RNOR status was a constant source of confusion and a unique-to-India complexity.

The Income-tax Act, 2025, abolishes the RNOR category.

We are now aligned with the rest of the world. There are only two, simple statuses:

1. Resident
2. Non-Resident

The rules to determine if you are a “Resident” have also been simplified and made more stringent, based on a simple “days in India” test. This move makes India’s tax code far more logical and predictable for global citizens and returning Indians.

A Simple Change in Philosophy: “Taxpayer” Replaces “Assessee”

This is my favorite change because it’s not just legal—it’s philosophical.

The 1961 Act, written in a different era, called you an “assessee.” This is a passive, cold, and slightly adversarial term. It means “a person who is being assessed (by a tax officer).” It frames the relationship as you vs. the department.

The new Act, 2025, consistently replaces this term with “Taxpayer.”

This single-word change signals the entire philosophy of the new law. It’s a move from an adversarial relationship to a cooperative one. A “taxpayer” is a partner in nation-building, an active participant. The new law is written for the “Taxpayer,” not at the “assessee.” This change in tone is designed to improve trust and voluntary compliance.

You are no longer an “assessee.” You are a “Taxpayer.”

Part 3: The New Tax Slabs & Rates (How the Act, 2025 Hits Your Wallet)

This is the section you’ve been waiting for. The terminology changes in Part 1 and 2 are important, but the core question for every single taxpayer is: “Will I pay more or less tax?”

The Income-tax Act, 2025, doesn’t just simplify the language; it completely overhauls the personal income tax structure. It takes the “New Tax Regime” (which was previously an option) and makes it the new, official, and default tax system for everyone.

You can still choose to use the old 1961 Act’s “Old Regime,” but you will have to specifically opt-out of this new, simpler system.

Let’s break down the new numbers, piece by piece.

The New Default: Personal Income Tax Slabs (For TY 2026-27 Onwards)

The new Act introduces a more granular and logical tax slab system. The goal is to lower taxes for most of the middle class and remove the harsh “jumps” in tax rates.

Here are the new, default tax slabs that will apply to your income earned in the Tax Year 2026-27 (i.e., from April 1, 2026, to March 31, 2027).

New Tax Slabs (Income-tax Act, 2025)	Tax Rate
Up to ₹4,00,000	0% (Nil)
From ₹4,00,001 to ₹8,00,000	5%
From ₹8,00,001 to ₹12,00,000	10%
From ₹12,00,001 to ₹16,00,000	15%
From ₹16,00,001 to ₹20,00,000	20%
From ₹20,00,001 to ₹24,00,000	25%
Above ₹24,00,001	30%

(Note: Surcharge and Cess will be applied on top of these rates as applicable.)

(H3) The Two “Magic Numbers” in the New Tax Act

The slab table is only half the story. The new Act introduces two massive benefits that make this system incredibly attractive, especially for salaried taxpayers.

1. The ₹12 Lakh “Zero-Tax” Trick (Section 87A Rebate)

The new Act has super-charged the tax rebate under Section 87A.

• What it is: A “rebate” is a direct discount on the tax you owe.
• The New Rule: The rebate has been increased to ₹60,000.
• What it means: If your total tax liability is ₹60,000 or less, you pay zero tax.
• The Math: Under the new slabs, a person earning exactly ₹12,00,000 has a tax liability of exactly ₹60,000 (5% on 4L + 10% on 4L).
• The Bottom Line: If your taxable income is ₹12,00,000 or less, you will pay ₹0 in income tax.

This is a revolutionary change, raising the effective tax-free-in-hand income to a level never seen before.

2. The New Standard Deduction: ₹75,000

The other major complaint about the old “New Regime” was that it didn’t allow the Standard Deduction for salaried employees. The Income-tax Act, 2025, fixes this.

• The New Rule: A Standard Deduction of ₹75,000 is now available to all salaried taxpayers and pensioners under the new default system.
• What it means: This deduction is applied before the tax slabs. If your salary is ₹20,75,000, your taxable income is automatically reduced to ₹20,00,000.

Putting It Together: The ₹12.75 Lakh “Tax-Free” Salary

Now, let’s combine these two magic numbers for a salaried individual.

1. You earn a gross salary of: ₹12,75,000
2. The new Act gives you a Standard Deduction: – ₹75,000
3. Your “Taxable Income” is now: ₹12,00,000
4. Your tax liability on ₹12L is ₹60,000.
5. The new Act gives you a Rebate (u/s 87A): – ₹60,000
6. Your Final Tax Payable: ₹0

This is the single most important takeaway: Under the Income-tax Act, 2025, a salaried person earning up to ₹12.75 lakhs will pay zero income tax.

Big Changes for Investors: The New Capital Gains Tax

The 2025 Act also tackles the overly complex world of capital gains. It simplifies the rates but introduces a critical new rule about inflation-adjustment (indexation).

New (and Mostly Higher) Capital Gains Tax Rates

• Short-Term Capital Gains (STCG) on listed stocks/MFs: The tax rate has been increased from 15% to a flat 20%. This is a clear move to discourage short-term “trading” and encourage long-term “investing.”
• Long-Term Capital Gains (LTCG) on listed stocks/MFs:
  • The tax rate is now a flat 12.5% (a slight increase from the previous 10%).
  • The tax-free exemption limit (under Sec 112A) has been increased from ₹1 lakh to ₹1.25 lakh.

The End of Indexation (For New Assets)

This is the most complex change for long-term investors, especially in property and debt funds.

• “Indexation” was the benefit of adjusting your purchase price for inflation, which lowered your “on-paper” profit and thus your tax.
• The New Rule: For any asset (property, gold, debt funds, etc.) purchased after July 23, 2024, the benefit of indexation is gone.
• The Old Rule (Grandfathered): If you own an asset purchased before July 23, 2024, you are in luck. The new Act gives you a choice when you sell it:
  1. Pay tax at 12.5% on the simple profit (no indexation).OR
  2. Pay tax at the old rate of 20%, but with the benefit of indexation.

You (or your Chartered Accountant) will be able to calculate both and choose whichever results in a lower tax bill. This is a fair compromise for existing investments.

What About Businesses? Simplified Corporate Tax

For business owners, the goal was simplification. The Act, 2025, moves to a unified corporate tax rate of 30% for both domestic and foreign companies.

This rate comes with a simplified (and much shorter) list of allowed deductions. However, just like in the personal tax system, the Act offers a “default” path: companies can opt for even lower tax rates (like 22% or 15% for new manufacturing) if they agree to give up all special exemptions and deductions.

The theme is clear: Pay a simple, flat, low tax, or pay a higher tax and maintain complex deductions. The choice is now with the taxpayer.

Part 4: Your New Tax Checklist – How to Prepare for the Income-tax Act, 2025

We’ve covered the why (the “Tax Year”), the what (the new terms), and the how much (the new slabs and rates). Now, let’s get practical. This is the “so what?” section.

The transition to a new tax act is a major event. You can’t just sit back and let it happen. Use this checklist, broken down by who you are, to ensure you are 100% prepared for the first filing under the new Act.

For Salaried Employees & Pensioners

Your transition is the most straightforward, but you still have critical action items.

1. Scrutinize Your First “New” Pay slip and Form 16

This is your #1 job. When you get your first payslip after April 1, 2026, check it. Your TDS (Tax Deducted at Source) will now be calculated based on the new slabs. Your Form 16 at the end of the year will look different:

• It will clearly state “Tax Year (TY) 2026-27.”
• It will (and must) show the ₹75,000 Standard Deduction being applied.
• Your tax calculation will reflect the new 5%, 10%, 15% slabs, not the old ones.

2. Re-evaluate All Your Tax-Saving Investments (80C, 80D)

This is the big one. For years, you’ve been told to put ₹1.5 Lakhs into PPF, ELSS, or FDs to “save tax” under Section 80C.

• The New Reality: With the new default regime, these deductions are not available.
• The Good News: For most people, the new tax slabs save you more money than the old deductions did.
• Your Action: If your income is under ₹12.75 Lakhs, your tax is already zero. You no longer need to make a tax-saving investment. You are free.
• The New Mindset: Invest for WEALTH, not to save tax. Now you can choose the best investment (like an index fund or a simple FD), not just the one that was in the 80C list.

3. Inform Your Employer of Your Choice (If You Opt-Out)

The new, simpler tax system (with the ₹75,000 deduction) is the default. If, for some reason, you are one of the very few people who benefits from the old 1961 Act’s “Old Regime” (with all its complex deductions), you must specifically file a form to opt out of the new one. For 99% of people, the default will be the best choice.

For Business Owners & Freelancers

You have the most urgent to-do list. The entire plumbing of your financial system is changing.

1. URGENT: Update Your Accounting Software

This is not optional. Your Tally, Zoho, QuickBooks, or any other software is the engine of your compliance. You must ensure it is updated to a version that is fully compliant with the Income-tax Act, 2025.

• It must use the term “Tax Year.”
• It must have the new expense disallowance lists.
• It must calculate depreciation based on the new Act’s rules.
• It must have the new corporate tax rates (if applicable). Contact your software vendor today and ask for their “DTC 2025” compliance timeline.

2. Meet With Your Chartered Accountant (CA)

Do not try to DIY this transition. This is the year to put your CA on speed dial. Schedule a specific meeting to discuss:

• The new list of “disallowed expenses” and how to re-categorize your ledgers.
• The new, unified corporate tax rates. Is it time to change your business structure (from Proprietorship to LLP or Pvt. Ltd.)?
• How to handle Advance Tax calculations for the first two quarters of TY 2026-27.

3. Train Your Accounts Team & Update Your Invoices

Your team needs to be trained on the new language. They must stop thinking in “PY/AY.” All new ledgers, invoices, and expense reports must be filed under the “Tax Year 2026-27.” Update your invoice templates to reflect the new compliance standards.

For All Investors (Stocks, Mutual Funds, Real Estate)

Your world just got simpler in some ways and more complex in others.

1. Create a “Grandfathered Assets” Spreadsheet

As we discussed in Part 3, any asset bought before July 23, 2024, is “grandfathered.” This means when you sell it, you get to choose between the 12.5% tax (no indexation) or the 20% tax (with indexation).

• Your Action: Go through your records NOW. Create a spreadsheet.
• Columns: Asset Name (e.g., “XYZ Flat,” “ABC Mutual Fund”), Purchase Date, Purchase Cost.
• Keep the purchase deeds, stock contract notes, and MF statements for these assets in a secure “Grandfathered” file. Your CA will need this to save you money when you sell.

2. Re-assess Your Mutual Fund Strategy

The new rules are game-changers:

• STCG (Short-term) on stocks: Now 20%. This makes “day trading” or “swing trading” far less profitable. The government is clearly telling you to invest, not gamble.
• Debt Funds: With indexation gone for new purchases, traditional debt funds have lost their biggest tax advantage. You may need to look at other fixed-income options.
• Your Action: Sit with a SEBI-registered financial advisor (not just your mutual fund distributor) to review your portfolio in light of these new tax rules.

Conclusion: Welcome to a Simpler, Clearer Tax Future

Change, especially when it comes to taxes, can be intimidating. The new Income-tax Act, 2025, represents the single biggest tax reform in modern Indian history. It’s a full “rip and replace” of a 60-year-old system.

But unlike past changes, this one is driven by a single, powerful idea: simplification.

The government is making a bet. They believe that if the tax code is simple, logical, and easy to understand, compliance will follow. By killing the “Assessment Year,” they have removed the biggest psychological barrier for millions of taxpayers. By introducing logical slabs and a high tax-free limit, they have put more money in the hands of the middle class.

This new Act isn’t just a new law. It’s a new mindset. It’s a move from an adversarial “assessee vs. officer” relationship to a modern “taxpayer-partner” model.

Your old, complex knowledge is obsolete. Your new, simpler future has begun.

Key Takeaways: Your 30-Second Summary

• 1. “Assessment Year” is GONE. Your new reality is the “Tax Year (TY)” (e.g., TY 2026-27). You earn in a Tax Year, and you file for that same Tax Year.
• 2. Your Wallet Wins. The new default tax system is simpler. A salaried income up to ₹12.75 Lakhs is effectively tax-free due to the new ₹75,000 Standard Deduction and the ₹60,000 rebate.
• 3. Your Dictionary is Updated. You are now a “Taxpayer,” not an “assessee.” You have “Income from Employment,” not “Salary.” The “RNOR” status is gone.
• 4. Investors Must Adapt. Capital Gains tax rules are new. STCG on stocks is 20%. Indexation is gone for new assets. And a critical “grandfathering” date (July 23, 2024) protects your old investments.
• 5. Your Action is Required. This is not a drill. Update your software, create your “grandfathered asset” list, and book a meeting with your Chartered Accountant for this year. This is not the year to DIY your taxes.

Disclaimer: This article is an in-depth guide for informational and educational purposes only. It is based on the provisions of the Income-tax Act, 2025. Tax laws are complex and subject to individual interpretation. The information in this post does not constitute financial, legal, or tax advice. Please consult with a qualified Chartered Accountant or financial advisor to discuss your specific financial situation and ensure compliance.

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