Previous Year (PY) as per section 3 of Income Tax Act, 1961 is a year in which income is earned. This income is taxed in the next year which is called assessment year. Previous Year (PY) is also a period of twelve months starting from 1st April and ending on 31st March.
Theoretically, AY and PY both are financial year. But, in practical life, PY is used as synonymous to financial year.
Now, let us understand with the help of example.
Suppose you have earned income (salary or any other) from 1st April 2014 to 31st March 2015. In this case:
- Previous year is from 1st Apr-14 to 31st Mar-15. This is the period in which income is earned. Short form used here for year is ”PY 2014-15”.
- Assessment year is from 1st Apr-15 to 31st Mar-15. This is the period in which income is assessed/ taxed related to previous year. Short form used here for year is ”AY 2015-16”.
- Financial year, as practically used, is from 1st Apr-14 to 31st Mar-15. Short form used here for year is ”FY 2014-15”.
I hope that above has cleared your concepts.