It is the year in which the income of the previous year is assessed for taxation. For example, the income of the financial year 1997-98 will be taxed according to the prevailing rates in the assessment year 1998-99. It is interesting to note that the current financial year is referred to as the "Previous Year" in the Act.

An individual or a firm by whom any tax or any other sum of money is payable under the Act is called an assessee. The assessee could be any one of the following:

1. An Individual.
2. A Hindu Undivided Family (HUF) consisting of all persons lineally descended from a common ancestor and deriving income from a joint family corpus. This includes Jain, Buddhist, and Sikh families too.
3. A Company.
4. A Firm
5. An association of persons, or a Body of Individuals
6. An artificial juridical person, e.g. a Hindu Deity.

However, there are other incomes that are deemed to be the assessee's and is therefore clubbed with his income. For example, income of spouse from a concern where the assessee has a substantial interest, or the income of a minor child.

1. Income of an assessee is computed under the following categories:

1. Income from remuneration.
2. Income from a residential property
3. Profits or gains from business of profession.
4. Capital gains
5. Income from other sources

2. Income exempt from tax is reduced from other income. The Act gives a long list of incomes, which are considered exempt from tax.

3. Deductions are allowed from certain incomes and for certain assessees.

1. Tax is then calculated.
2. Rebates relating to investments made in Government savings are given. The balance amount is the amount of tax payable.

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