Income Tax Law | Updated 24 October 2026
Section 3 of Income Tax Act, 1961: Previous Year Defined
Section 3 of the Income-tax Act, 1961 defines the previous year for income-tax purposes. It generally means the financial year immediately before the assessment year. Special rules apply when a business, profession or income source begins during that financial year.
Section 3: Statutory definition under the Income-tax Act, 1961
For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
Official text: Income Tax Department - Section 3, Income-tax Act, 1961.
Meaning of previous year and assessment year
Previous year: The financial year in which income is earned, ordinarily from 1 April to 31 March, under section 3 of the 1961 Act.
Assessment year: Under section 2(9) of the 1961 Act, the twelve-month period beginning on 1 April each year. Ordinarily, income of the preceding financial year is assessed in that assessment year, subject to special statutory provisions.
| Income earned during previous year | Corresponding assessment year under the 1961 Act |
|---|---|
| 1 April 2024 to 31 March 2025 (FY 2024-25) | AY 2025-26 |
| 1 April 2025 to 31 March 2026 (FY 2025-26) | AY 2026-27 (transitional period; subject to applicable savings) |
New business, profession or source of income
The proviso to section 3 addresses a business or profession first set up, or a source of income first coming into existence, partway through the financial year. In such cases, the previous year begins on the relevant commencement date and ends on 31 March of that financial year.
Example: If a business was set up on 1 October 2024, its first previous year was 1 October 2024 to 31 March 2025, rather than the full twelve months. The corresponding assessment year was 2025-26.
Tax year under the Income-tax Act, 2025
Section 3 of the Income-tax Act, 2025 defines the tax year as the twelve-month period of the financial year commencing on 1 April. For a newly established business or profession, or a newly arising source of income, the tax year begins on the relevant date of establishment or commencement and ends with that financial year. This removes the need to use separate previous-year and assessment-year terminology for the new regime.
For example, the tax year 2026-27 runs from 1 April 2026 to 31 March 2027. Consult the official 2025 Act (section 3) for the complete operative provision.
Transition from the 1961 Act to the 2025 Act
Section 536 of the Income-tax Act, 2025 repeals the 1961 Act while preserving specified rights, liabilities, assessments, appeals and other proceedings relating to earlier years. Accordingly, the correct statutory provision depends on the relevant period and the nature of the proceeding. Repeal does not automatically invalidate earlier assessments or pending proceedings.
The Income Tax Department's 2025 Act resource page provides the legislation, rules, comparison utilities and transition guidance.
Frequently asked questions
Is previous year the same as assessment year?
No. Under the 1961 Act, the previous year is ordinarily the year when income is earned; the assessment year is the following twelve-month period beginning 1 April.
Can the first previous year be shorter than twelve months?
Yes. When a business or profession is newly set up, or a source of income first arises during the financial year, section 3 provides for a shorter first previous year.
Does Section 3 of the 1961 Act still apply after April 2026?
It remains relevant for periods and proceedings governed by the 1961 Act under the repeal-and-savings provisions of section 536 of the Income-tax Act, 2025.
Official legal references
Section 3 - Income-tax Act, 1961 (Income Tax Department)
Income-tax Act, 2025 - official full text (sections 3 and 536)
Legislative history: Section 3 of the 1961 Act was substituted by the Finance Act, 1999 (Act 27 of 1999), section 4, with effect from 1 April 2000. This page is for general legal information; verify the law applicable to the specific tax period.