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Home > Income Tax > Help Center > Taxpayers pay Taxes Last Updated: Nov 28th 2024

Why should Taxpayers pay Taxes in the Same year?

Previous year (aka financial year) income is usually taxable in Assessment year. Sometimes this rule does not apply and the income from the previous year is taxable in that year only.

For instance, income earned in the previous year (financial year) 2023-24 is subject to taxation in the assessment year 2024-25.

Taxpayers pay Taxes

This document covers

  1. What is Previous Year and Assessment year?
  2. Cases where the income of previous year is taxable in the previous year itself
    1. Shipping Business of Non-Resident
    2. Persons leaving India
    3. AOP/BOI/ Artificial Judicial Person (AJP) formed
    4. Persons likely to transfer property to avoid taxes
    5. Discontinued Business
  3. Tax Clearance Certificate

1. What is Previous Year and Assessment year?

Previous Year (PY): Previous year means the financial year immediately preceding the assessment year. The year in which income is earned is called previous year.

Assessment Year (AY): It means a period of 12 months which commences on 01st April every year. The year in which income is taxable is called assessment year.

EXAMPLE:
The assessment year to file taxes for AY 2023-24 is for the income generated in the previous year PY 2022-23 (aka Financial Year FY).

2. Cases where the income of previous year is taxable in the previous year itself (Exceptions to general rule)


2.1. Shipping Business of Non-Resident Indian (NRI)

  • The shipping business of Non Resident is required to pay taxes in previous year itself if the ship belongs to a Non Resident or chartered by Non Resident and it is carrying passengers, livestock, mail or goods shipped at a port in India.
  • The deemed income of the ship will be 7.5% of the freight paid or payable to the owner or charterer of the ship whether in India or outside India on account of such carriage.
  • The ship is required to pay or make satisfactory arrangements for payment of Tax before the ship is leaving the port.

2.2. Persons leaving India

  • If Income Tax officer is of the opinion that any individual might leave India during the current Assessment year or shortly after its expiry and the individual don’t have present intention of returning to India, the income of the individual will be assessed in the previous year itself.
  • Income from the end of previous year upto the date of probable date of his departure from India is chargeable to tax in the same previous year.
EXAMPLE:
Mr James is leaving to Australia on 10th Oct 2024 and he has no intention to return to India. In this case, the Income tax officer will ask Mr James to pay the taxes on the income earned from 01st April 2024 to 10th Oct 2024. James to pay the taxes on the income earned from 01st April 2024 to 10th Oct 2024.

2.3. AOP/BOI/ Artificial Judicial Person (AJP) formed for a particular event or purpose

  • If AOP/BOI/AJP is formed for a particular event or purpose and the Assessing officer is of the opinion that AOP/BOI/AJP is likely to be dissolved in the same year or next year, the AOP/BOI/AJP is required to pay taxes on the income earned upto date of dissolution in the same previous year
  • In normal cases, AOP is required to pay taxes in AY 2025-26
EXAMPLE:
Dasari Organics is an AOP formed for a limited purpose of organizing exhibition for organic products for a limited period. Dasari Organics was formed on 15th August 2024 and it will be dissolved after 3 months time i.e,, 15th Nov 2024. In this case, the assessing officer will assess the income of AOP from 15th Aug 2024 to 15th Nov 2024 in FY 2024-25 itself.

2.4. Persons likely to transfer property to avoid taxes

  • In the event that the Assessing Officer suspects that an individual intends to sell, dispose of, or transfer property in order to evade tax payments, the AO will evaluate the individual's income from the previous year. Additionally, the individual is obligated to pay taxes at the same time.

2.5. Discontinued Business

  • The income earned between the end of the previous year and the date of discontinuation will be taxed in the same assessment year at the discretion of the Assessing Officer if such business or profession is discontinued in the same assessment year.

3. Tax Clearance Certificate

Certain persons are required to get Tax Clearance Certificate before leaving India. The following persons are required to get Tax Clearance Certificate

  • If the person is involved in serious financial irregularities and his presence is necessary for investigation and there is a possibility that tax demand will be raised against them
  • If the taxpayer has tax demand of more than tax demand of more than Rs 10 lakhs and it is not stayed by any authority.


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Disclaimer: This article provides an overview and general guidance, not exhaustive for brevity. Please refer Income Tax Act, GST Act, Companies Act and other tax compliance acts, Rules, and Notifications for details.