The phrase “income of the previous year is taxed in the current year” refers to the basic principle of taxation in India, known as the “Previous Year” and “Assessment Year” concept.
According to the Income Tax Act, the “Previous Year” refers to the financial year in which the income is earned or received, and the “Assessment Year” refers to the financial year immediately following the previous year in which the income tax return is filed and the income is assessed and taxed.
For instance, let's consider the previous year 2021-22. Here, the income earned between April 1, 2021, and March 31, 2022, is considered the previous year's income. The assessment year for this previous year will be 2022-23, during which the taxpayer will file their income tax return and pay taxes on their previous year's income.
This means that any income earned during the previous year is taxed in the assessment year, even if the income was not received or paid during the assessment year. For example, if an individual earns a salary of Rs. 10 lakh in the financial year 2021-22, but receives the salary in April 2022, the salary will still be taxable in the assessment year 2022-23.
Moreover, the tax liability for the assessment year is calculated based on the total income earned in the previous year. The income tax return filed for the assessment year reflects the details of the income earned in the previous year, including income from salary, house property, business or profession, capital gains, and other sources.
Therefore, the previous year and assessment year concept ensures that the income tax system in India is based on the principle of taxation of income earned in a particular year, and that income earned in a specific financial year is taxed in the subsequent assessment year.
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