While creating databases for various reasons or specifically for Income Tax records, the time period is a must. The time period plays an important role in setting limits to data and to have the desired data. As far as Financial Accounting is concerned, the time period is the Financial year (1st April of a year to 31st March of the next year) and not the usual year.
With this requirement comes to us, the terms in consideration “Previous Year” and “Assessment Year”. Both have very different meanings and should be distinguished thoroughly before using any one of them.
Previous Year vs Assessment Year
The difference between Previous Year and Assessment Year is that while Previous Year is the year when the actual transactions happened or the period to which our data of Income sources belong, Assessment Year is the following (for tax revenue collection) or any other year in which the data is processed.
For instance, if we have to process and evaluate the tax records of 2019, the previous year would be 2019 (the year for which data is collected), while 2020 would be the assessment year (when the actual process of analysis and tax collection takes place).
Comparison Table Between Previous Year and Assessment Year (in Tabular Form)
|Parameter of Comparison||Previous Year||Assessment Year|
|Meaning||The Previous year is the year for which the data and sources of Income are collected and organized.||Assessment Year is one in which the data of the previous year is assessed and Income tax calculated.|
|Time duration||It can be less than or equal to 12 months. 12 months if the activity continues the whole year and less if either the activity started late or ended up early.||It has to be equal to 12 months. The activity is assessed in entire period.|
|Financial Year||It is usually the financial year preceding the current financial year.||It is usually the current financial year.|
|Need||The year is important to collect data.||The year is important to analyze data and calculate Income Tax|
|Processes||The real activities take place in this year.||Taxes are paid in this year.|
What is Previous Year?
We pay Income Tax as a percentage of all the sources of income in the financial year which starts from 1st April of one year to 31st March of the succeeding year. We pay the Income-tax in the year succeeding the year in which we earned.
The year in which we earn is called Previous Year in the words of the Income Tax Act. All the actual transactions happen during this year.
It may be less than or equal to 12 months. It is equal to 12 months if the sources of income were active throughout the year and less than 12 months if the sources were set up late or ended up before the financial year ended.
For example, a person retires in the middle of the financial year or a startup company emerges in the middle of a financial year. In both cases their income sources aren’t active the entire 12 month period, therefore, their income would be considered only for the months they were active.
When we talk about paying taxes or collecting taxes in the current year, the year preceding the current year is the Previous Year. This year is important in terms of the collection of data regarding income and their sources.
What is Assessment Year?
Every year we pay taxes over the Income earned in the Previous Year (that is, the transactions that took place in the preceding year of the current year). Not every taxpayer would pay the tax at the same time and same day.
Calculation of taxes requires time for assessment, calculation and payment of taxes. All these processes are undertaken in the year, succeeding the year for which the taxes are collected.
It is a full financial year (that is, 12 months). It is exactly 12 month period because the processes of calculation, collection and assessment are spread over different periods of the year.
When we talk about paying or collecting taxes in the current year, the current year itself is the Assessment Year. The year is important for collection of actual Tax Revenue for the government.
Main Differences Between Previous Year and Assessment Year
- The previous year is the year for which the data of activity and income is collected and compiled whereas the assessment year is the year in which Income Tax is calculated and collected.
- The previous year is either less than or equal to 12 months while the assessment year is always 12 months long. Assessment of taxes requires 12 months time as different stage are undertaken in specific periods while Previous year can be shorter if the sources of Income were active partially during the financial year.
- When we talk about paying taxes, usually the year preceding the current financial year is the previous year while the current year itself is the assessment year.
- Previous Year is important to collect data regarding the sources of Income and their activity while the Assessment year is important for the assessment of Income Tax revenue by the Government.
- The actual transactions and data collection take place in the previous year while the calculation and collection of taxes by the Government happens in the Assessment Year.
The previous year is the year which becomes the source of Income activities and the year for which data is collected whereas Assessment year is the year in which the outputs of the previous year are subjected to taxes levied by the government. The taxes collected are basically, collected for the Previous year but in the Assessment Year. The previous year is either less than 12 or equal to 12 months while the assessment year is always a complete period of 12 months.
The differentiation between the previous year and the assessment year becomes very important to understand the basic concepts and principles of tax collection and to assess the data more efficiently. When talking about the present, the financial year preceding the current financial year is usually the Previous Year and the current year itself is the Assessment Year.
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