Financial Year

The Income-tax Act, 2025 abolished both of the terms this entry is about. Section 3(1) provides that tax year means the twelve months period of the financial year commencing on the 1st April, and the 2025 Act has no assessment year and no previous year at all. One concept replaces two.

That does not make the older pair obsolete yet, and the reason is worth stating precisely. Section 536(2) of the 2025 Act continues the repealed Income-tax Act, 1961 for any tax year beginning before 1 April 2026, and the Finance Act, 2026 charges income-tax for the assessment year commencing 1 April 2026 under the 1961 Act itself, at the rates in Part I-A of its First Schedule. So for income of the financial year 2025-26 and earlier, the assessment year and previous year framework described below is the framework that applies, and it is what a return filed in 2026 is filed under.

From tax year 2026-27 onward there is one period and one name for it. An HR or payroll team should expect both vocabularies in circulation for the next few years, and should be careful which one a form, a notice or a piece of software means.

The financial year, 1 April to 31 March, is the period income is earned in and taxed for. In payroll it governs more than the tax computation.

• The tax projection. Deduction on salary is computed on estimated income for the whole year and collected across the months remaining.
• Investment declarations and the evidence cycle, which run to the year end.
• The annual certificate, issued for the financial year after it closes.
• Quarterly salary tax statements, which divide the same year.
• Regime selection, which is made for the year.
• Exemption limits that are annual, such as leave travel within its block of years and the various capped allowances.

Because the projection runs across the year, the timing of anything unusual matters as much as its amount. A payment in April is spread across twelve months of deduction. The same payment in February is collected across two.

Two terms for two different things, and they are confused constantly, including on forms.

The practical consequence is that a return filed for a financial year is filed under the assessment year label, and an employee selecting the wrong one on a form or a challan sends the payment or the filing to the wrong period. Where an employee reports that a credit is missing from their annual statement, a year mismatch is worth checking before anything else.

Several things in payroll run on their own calendar, and assuming April to March for all of them is a reliable source of error.

• State insurance contribution and benefit periods are fixed six-month windows that do not end in March. The rule that an employee crossing the wage threshold stays covered to the end of the contribution period is regularly misapplied because someone thought in financial year terms.
• The bonus accounting year is the employer's accounting year, which is usually but not necessarily the financial year, and the payment deadline runs from its close.
• Leave years are commonly calendar years, or the employer's own, so leave accrual, carry forward and encashment do not share a boundary with the tax cycle.
• Appraisal and increment cycles are set by the organisation, and a revision effective from a past date generates arrears that fall into whichever financial year they are paid in, not the one they relate to.
• Provident fund and most other deposit obligations run monthly and are indifferent to the year boundary.

None of these mismatches is a problem in itself. They become problems when a process assumes a single year boundary for all of them, which is how an employee ends up with their state insurance coverage stopped in the wrong month or their leave encashed against the wrong balance.

The financial year's shape makes March structurally hard, and the causes are predictable.

• Declaration evidence that never arrived is withdrawn, so exemptions applied for eleven months are reversed and the tax collected in one.
• Perquisite valuations are settled late, moving taxable income after most of the deduction has been made.
• Any correction found in the year-end reconciliation has one month to be collected in.
• Employees who changed regime, or should have, discover it now.
• A mid-year joiner whose previous employment details never reached payroll finds the shortfall at filing, which is later still.

Most of this is avoidable by moving the evidence cycle earlier. Collecting proof in December rather than March leaves three months to spread a correction over instead of one, and it converts an alarming single deduction into an adjustment nobody notices.

The other half is the mid-year joiner. Previous employment details in the same financial year change the projection materially, and they are routinely collected on a joining form that never reaches whoever configures payroll.