“This year’s income is subject to taxes from the prior year.” Describe.
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“This year’s income is subject to taxes from the prior year.” Describe.
Taxation of Income in the Current Year for Previous Year's Income:
In the context of income tax, the principle that "the income of the previous year is taxed in the current year" refers to the basis on which income tax is levied. According to the Income Tax Act, income earned in a particular financial year (previous year) is assessed and taxed in the subsequent financial year (assessment year). This principle ensures that the taxation process aligns with the actual receipt or accrual of income by taxpayers.
Explanation:
Previous Year: The previous year refers to the financial year in which income is earned. For example, if income is earned between April 1, 2023, and March 31, 2024, then the financial year 2023-24 is considered as the previous year for taxation purposes.
Assessment Year: The assessment year is the financial year immediately following the previous year. Using the example above, if income is earned in 2023-24 (previous year), then the assessment year for this income would be 2024-25.
Taxation Process: The income earned during the previous year is assessed for tax liability in the assessment year. Taxpayers are required to file their income tax returns for the previous year during the assessment year. The tax payable on this income is calculated based on the prevailing tax rates and deductions available under the Income Tax Act.
Advance Tax: To ensure regular payment of taxes, taxpayers are required to pay advance tax based on the income earned or estimated to be earned during the current financial year. This helps in avoiding a lump sum tax liability at the end of the assessment year.
Example: If a person earns income during the financial year 2023-24 (previous year), the tax on this income will be calculated and paid in the assessment year 2024-25. The income earned in 2023-24 will form the basis for tax calculation for the assessment year 2024-25.
Conclusion:
The principle that "the income of the previous year is taxed in the current year" is a fundamental concept in income tax law. It ensures that income is taxed in the year it is earned, providing a systematic and fair approach to taxation.