Tax Year 2026-27: How to Read the New Income Tax Terminology

The introduction of the Income Tax Act, 2025 brings an important terminology change for taxpayers from 1 April 2026.

One of the most important changes is the introduction of the term “Tax Year” and the discontinuation of the “Assessment Year” concept under the new Act.

For taxpayers and businesses, this can initially create confusion because the terms Financial Year, Previous Year, Assessment Year and Tax Year may appear together during the transition period.

Understanding how these terms relate to each other can make tax payments, accounting records and income-tax compliance easier to manage.

What Is Tax Year 2026-27?

Under the Income Tax Act, 2025, a Tax Year is generally the twelve-month period of the financial year beginning on 1 April.

Therefore:

Tax Year 2026-27 = 1 April 2026 to 31 March 2027

The Income Tax Department explains that the Tax Year concept applies from 1 April 2026 and corresponds to the earlier “Previous Year” concept under the Income Tax Act, 1961.

In simple terms:

Income earned during FY 2026-27 → Tax Year 2026-27

Why Has the Terminology Changed?

Under the Income Tax Act, 1961, taxpayers commonly used two different year references:

• Previous Year
• Assessment Year

For example:

Income earned during FY 2025-26 → Previous Year 2025-26 → Assessment Year 2026-27

This two-year terminology could sometimes be confusing.

Under the Income Tax Act, 2025, the terminology has been simplified by using Tax Year, which aligns with the financial year.

Therefore:

Income earned during FY 2026-27 → Tax Year 2026-27

This creates a direct connection between the period in which income is earned and the Tax Year reference.

Financial Year vs Tax Year

The terms Financial Year (FY) and Tax Year (TY) are closely aligned under the new framework.

Financial Year 2026-27

The financial year runs from:

1 April 2026 to 31 March 2027

Tax Year 2026-27

Under the new Act, the corresponding Tax Year is also:

1 April 2026 to 31 March 2027

So, for Tax Year 2026-27:

FY 2026-27 = Tax Year 2026-27

The Income Tax Department confirms that businesses do not need to change their accounting year merely because the Tax Year terminology has been introduced.

What Happened to “Previous Year”?

The term Previous Year was used under the Income Tax Act, 1961.

For example:

Income earned from 1 April 2025 to 31 March 2026

was the Previous Year 2025-26.

Under the new Income Tax Act, 2025, the corresponding terminology is:

Tax Year 2025-26

However, the transition rules are important because earlier years continue to be governed by the old Act.

What Happened to “Assessment Year”?

This is one of the most important changes.

Under the Income Tax Act, 2025, there is no concept of Assessment Year.

Instead, the new Act uses Tax Year.

For example:

Old Framework

Income earned:

FY 2025-26

was reported for:

AY 2026-27

under the Income Tax Act, 1961.

New Framework

Income earned:

FY 2026-27

will be referred to as:

Tax Year 2026-27

under the Income Tax Act, 2025.

The Income Tax Department specifically states that Assessment Year continues for filings under the old Act, while the new Act uses Tax Year.

AY 2026-27 Is Not the Same as Tax Year 2026-27

This is particularly important during the transition period.

These two references relate to different income periods.

Therefore, taxpayers should not treat AY 2026-27 and Tax Year 2026-27 as interchangeable.

The Income Tax Department confirms that the return for income earned during FY 2025-26 is filed as AY 2026-27 under the old Act, while income earned during FY 2026-27 falls under the new Tax Year framework.

Simple Example to Understand the Difference

Suppose a business earns income during two consecutive years.

Income earned from April 2025 to March 2026

Period:

FY 2025-26

Old terminology:

Previous Year 2025-26

Return reference:

AY 2026-27

Applicable law:

Income Tax Act, 1961

Income earned from April 2026 to March 2027

Period:

FY 2026-27

New terminology:

Tax Year 2026-27

Applicable law:

Income Tax Act, 2025

This distinction is important when selecting the applicable Act and year on the Income Tax e-filing portal.

What Does “Tax Year” Mean for Businesses?

For businesses, the introduction of Tax Year does not mean that the accounting cycle has changed.

A business can continue maintaining its financial records for:

1 April to 31 March

For example:

• Sales during FY 2026-27
• Purchases during FY 2026-27
• Business expenses during FY 2026-27
• TDS during FY 2026-27
• Advance tax during FY 2026-27

will relate to Tax Year 2026-27, subject to the applicable provisions.

The Income Tax Department confirms that no change in the accounting period or financial statements is required because of the Tax Year concept.

What About a New Business Started During the Year?

A special situation can arise when a business or profession starts during a financial year.

For example, suppose a business starts on:

1 December 2026

Its Tax Year can begin from:

1 December 2026

and end on:

31 March 2027

Therefore, the first Tax Year would not necessarily cover the full twelve months.

The Income Tax Act, 2025 specifically provides for such situations where a business or source of income comes into existence during the financial year.

How Does the Transition Work?

The transition from the old Act to the new Act does not mean that earlier tax matters suddenly move to the new framework.

The Income Tax Act, 2025 contains transitional provisions to ensure continuity.

Generally:

Before 1 April 2026

Earlier tax years remain governed by the Income Tax Act, 1961.

From 1 April 2026

The Income Tax Act, 2025 applies to the new Tax Year framework.

This means businesses may need to deal with both old and new terminology during the transition period.

Example: AY 2026-27 vs Tax Year 2026-27

Consider the following timeline:

1 April 2025 → 31 March 2026

Income period: FY 2025-26

↓

AY 2026-27

↓

Income Tax Act, 1961

1 April 2026 → 31 March 2027

Income period: FY 2026-27

↓

Tax Year 2026-27

↓

Income Tax Act, 2025

The official transition guidance confirms that there is no missing or overlapping year between these two periods.

What Should Taxpayers Select on the Income Tax Portal?

The applicable selection depends on the period and the compliance being performed.

For example:

For AY 2026-27

If you are filing a return relating to income earned during FY 2025-26, the applicable framework remains the Income Tax Act, 1961.

For Tax Year 2026-27

For income earned from 1 April 2026 onwards, the Income Tax Act, 2025 applies.

The Income Tax Department's current portal guidance allows taxpayers to select the applicable Act and corresponding AY/TY depending on the relevant period.

Does the Change Affect Advance Tax?

Yes, taxpayers should pay attention to the applicable Tax Year when making advance tax payments.

For Tax Year 2026-27, advance tax relates to the new Income Tax Act, 2025.

For earlier periods such as AY 2026-27, payments relating to that old-law period continue under the Income Tax Act, 1961.

The Income Tax Department specifically states that advance tax for Tax Year 2026-27 is governed by the Income Tax Act, 2025.

Does the Change Affect Accounting Software?

Businesses do not need to change their accounting year simply because of the new terminology.

However, businesses should ensure that their accounting and tax systems can correctly distinguish between:

• FY 2025-26 / AY 2026-27
• FY 2026-27 / Tax Year 2026-27

Software used for taxation, payroll, TDS, accounting and compliance should be updated according to the applicable provisions and forms.

How Should Businesses Maintain Records During the Transition?

Businesses should maintain clear separation between the two periods.

For FY 2025-26

Maintain records relating to:

• Income
• Expenses
• TDS
• Tax payments
• GST records
• Financial statements
• AY 2026-27 return documentation

For FY 2026-27

Maintain records relating to:

• Income
• Expenses
• TDS
• Advance tax
• Tax payments
• GST records
• Financial statements
• Tax Year 2026-27 compliance

The Income Tax Department's transition guidance recommends maintaining clear demarcation of income, expenses, TDS and advance tax between FY 2025-26 and FY 2026-27.

Quick Terminology Guide

Common Mistakes to Avoid

Mistake 1: Treating AY 2026-27 as Tax Year 2026-27

They relate to different income periods.

Mistake 2: Applying the New Act to FY 2025-26

Income earned during FY 2025-26 remains governed by the old framework.

Mistake 3: Assuming Accounting Years Have Changed

The Tax Year is aligned with the financial year, so businesses do not need to change their accounting year merely because of the terminology change.

Mistake 4: Selecting the Wrong Act for Tax Payments

Taxpayers should check the relevant income period before selecting the applicable Act and year.

Mistake 5: Mixing Records of Two Tax Periods

Businesses should clearly separate FY 2025-26 records from FY 2026-27 records during the transition.

Quick Reference: Tax Year 2026-27

Income Period:
1 April 2026 – 31 March 2027

Financial Year:
FY 2026-27

Tax Year:
TY 2026-27

Applicable Act:
Income Tax Act, 2025

Assessment Year:
Not applicable under the new Act

Accounting Period:
No change required; businesses can continue with the 1 April–31 March financial year.

Final Takeaway

The biggest terminology change under the Income Tax Act, 2025 is the move from the Previous Year + Assessment Year framework to the Tax Year framework.

For the new period:

FY 2026-27 = Tax Year 2026-27

At the same time, AY 2026-27 continues to relate to income earned during FY 2025-26 under the Income Tax Act, 1961.

During the transition, taxpayers and businesses should carefully check the income period, applicable Act and relevant year before making tax payments, filing returns or maintaining compliance records.

Understanding the terminology correctly can help businesses keep their tax records organised and avoid selecting the wrong tax period during the transition.