Tax liability on income as prior period item

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deepika dhakad (Querist)
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28 July 2010 Hello Friends,

plz guide me abt Income Tax liability on income as prior period item. Whether it will be taxable or not? If it will be taxable then whether present tax rate will applicable or relevant tax rate applicable?
Plz guide me.
Thanks in advance

CMA. Subhash Kumar Jha

CMA. Subhash Kumar Jha (Expert)
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03 August 2010 Please elaborate your question with a greater detail.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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26 July 2025 Great question — **prior period income** can be a bit tricky under Indian Income Tax law and accounting standards. Let’s clear it up step by step.

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## 🔍 **What is "Prior Period Income"?**

It refers to **income relating to previous financial years** that:

* Was **not recognized** or recorded in those years due to errors or omissions, and
* Is **recognized now** in the **current financial year**.

Examples:

* Missed rental income, delayed receipts, earlier year's consultancy payment, etc.

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## ✅ **Is Prior Period Income Taxable?**

### ✅ **YES** — It is **taxable** in the **year it is received or recognized**, regardless of when it actually relates to.

> As per Indian tax law, **income is taxed on the basis of “accrual” or “receipt”**, whichever is earlier — unless the item was not known or not determinable earlier.

So:

* If the prior period income was **not recognized earlier due to genuine omission**, and
* It is **recorded now**,

➡️ It is **taxable in the year of recognition**.

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## 🔹 **What Tax Rate Applies?**

* The **current year’s applicable tax rate** will apply.
* There is **no concept of applying the old year’s slab or rate** to prior period items.

📌 So if you’re recognizing the income in FY 2024–25, you’ll pay tax at **FY 2024–25 rates**, even if the income belonged to FY 2022–23.

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## 🔹 Accounting Disclosure (if relevant)

Under **Accounting Standard (AS) 5**, prior period items should be:

* **Disclosed separately** in the profit and loss account (not netted off).
* But this does **not change the year of taxability** — still taxed in the year recognized.

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## ✅ Summary

| Question | Answer |
| -------------------------------- | --------------------------------------------- |
| Is prior period income taxable? | ✅ Yes |
| In which year is it taxed? | ✅ Year in which it is **recognized/received** |
| What tax rate applies? | ✅ **Current year’s** applicable tax slab |
| Do I need to revise old returns? | ❌ No, unless you want to shift it back (rare) |

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Let me know if you want help:

* Categorizing a specific prior period item
* Preparing a **disclosure note**
* Calculating tax impact based on your slab

Happy to assist!

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