Indian Income Tax Provisions: PY, Deductions, and Incidence

Posted on Jan 21, 2026 in Accounting and Finance

1. Definition of the Term ‘Previous Year’

The concept of ‘Previous Year’ (PY) is fundamental to the system of income taxation in India and is defined under Section 3 of the Income Tax Act, 1961. The core principle of income tax is that income earned in one year is taxed in the next year.

• Definition: The Previous Year (PY) is the financial year immediately preceding the Assessment Year (AY). It is the year in which the income is earned or accrued.
• Duration: A financial year starts on April 1st and ends on March 31st of the following calendar year. Therefore, a standard Previous Year is a 12-month period from April 1st to March 31st.
• The Rule of Taxation: “Income of the Previous Year is taxable in the Assessment Year.”

Exceptions (Cases where PY may be less than 12 months)

The first Previous Year may be less than 12 months in the following situations:

• New Business or Profession: If a new business or profession is set up, the PY begins from the date the business is set up and ends on the immediately following March 31st.
• New Source of Income: If a new source of income comes into existence, the PY begins from the date the source comes into existence and ends on the immediately following March 31st.

Note: The concept of ‘Previous Year’ ensures a structured and consistent period for calculating and reporting income before the tax liability is determined in the subsequent ‘Assessment Year’.

2. Deduction under Section 24(b) (Interest on Borrowed Capital)

Section 24 of the Income Tax Act deals with the allowed deductions from the Gross Annual Value (GAV) of a house property to arrive at the net taxable income under the head “Income from House Property.”

Section 24 provides for two deductions:

• Section 24(a): Standard Deduction (30% of Net Annual Value)
• Section 24(b): Deduction of Interest on Borrowed Capital

Section 24(b) allows an owner to claim a deduction for the interest payable on a loan borrowed for the purpose of acquiring, constructing, repairing, renewing, or reconstructing a house property.

The treatment and maximum limit for this deduction vary based on the nature of the property:

A. For Let-Out or Deemed Let-Out Property

• Deduction Limit: The entire actual interest paid or payable during the Previous Year is allowed as a deduction.
• Condition: There is no upper monetary limit on the interest deduction for a rented property. If the interest is very high, it can lead to a loss from house property.

B. For Self-Occupied Property (SOP)

• Deduction Limit: The deduction is subject to a specific maximum limit.

Purpose of Loan & Maximum Limit:

Aggregate Limit: The maximum deduction under Section 24(b) for all self-occupied properties combined (up to two properties can be treated as SOPs) is ₹2,00,000 or ₹30,000, as applicable.

C. Treatment of Pre-Construction Period Interest

Interest paid on the loan during the period beginning from the date of borrowing and ending on March 31st immediately preceding the date of completion of construction/acquisition is known as Pre-Construction Interest.

• Deduction: The total Pre-Construction Interest is not allowed in the year of payment. It is allowed as a deduction in five equal annual instalments.
• Commencement: The deduction starts from the Previous Year in which the construction or acquisition of the property is completed.
• Overall Cap: This 1/5th instalment, when added to the current year’s interest (Post-Construction Interest), must also be within the overall limit of ₹2,00,000 or ₹30,000 for a self-occupied property.

3. Computing Tax Liability on Integration of Agricultural Income

Under the Indian Income Tax Act, 1961, Agricultural Income is generally exempt from Central income tax under Section 10(1). However, a method known as “Partial Integration of Agricultural Income” is used to tax the non-agricultural income of certain assessees at a higher rate.

This integration method is applicable only to individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), and Body of Individuals (BOIs), and only if both of the following conditions are met:

• Net Agricultural Income exceeds ₹5,000 during the previous year.
• Non-Agricultural Income exceeds the basic exemption limit (e.g., ₹2,50,000 for a general individual).

Steps for Partial Integration

The calculation involves a two-step process to achieve the integration:

Example (Assessee under 60 years, Basic Exemption ₹2,50,000)

Income Details:

Computation of Tax Liability:

The purpose of this mechanism is to ensure that non-agricultural income is taxed using the higher tax slab bracket into which the individual would have fallen if the agricultural income had also been taxable.

4. Incidence of Taxation and Residential Status

The Incidence of Taxation refers to the extent or scope of a person’s income that becomes taxable in India. Under the Income Tax Act, 1961, the incidence of taxation is directly dependent upon the Residential Status of the assessee, as determined under Section 6.

Residential status (Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR)) decides which streams of income are included in the Total Income for taxation.

Types of Income and Taxability Nexus

Income can be broadly classified based on its source and location:

• Indian Income:
  • Income received (or deemed to be received) in India, OR
  • Income accrued/arising (or deemed to accrue/arise) in India.
• Foreign Income:
  • Income received and accrued/arisen outside India.

Incidence of Tax based on Residential Status

The scope of total income differs for the three categories of individuals as follows:

Suitable Examples

Let’s assume the Previous Year is 2024-25.

Example Analysis