The world of taxation can be overwhelming for many individuals, especially when it comes to terms like “Financial Year” and “Assessment Year.” While these terms are commonly used, there is often confusion surrounding their meaning and application. This article will clear up that confusion by providing a detailed explanation of the differences between the financial year and assessment year, helping you make sense of the tax filing process.
What Is a Financial Year?
Financial Year (FY), also known as the previous year, refers to the 12-month period in which you earn income. In India, the financial year begins on April 1st and ends on March 31st of the following year. During this time, income is earned by individuals, businesses, or any taxpayer.
It is important to note that the financial year is used for accounting and calculating tax liabilities, but taxes are not due in the same year. For example, if you earn income between April 1, 2022, and March 31, 2023, this period is known as Financial Year 2022-23.
What Is an Assessment Year?
An Assessment Year (AY) is the year following the financial year. During this time, the income earned in the preceding financial year is assessed for tax purposes, and the Income Tax Return (ITR) is filed. The assessment year starts on April 1st and ends on March 31st.
It is important to remember that tax is paid in the assessment year based on the income earned in the previous financial year. For example, if you earned income from April 1, 2022, to March 31, 2023, the assessment year during which your income is assessed would be 2023-24 (i.e., April 1, 2023, to March 31, 2024).
Financial Year and Assessment Year in India
In India, the financial year and the assessment year follow the same structure annually. Below is a breakdown of recent years, showing the correlation between the financial year and the corresponding assessment year.
| Financial Year (FY) | Assessment Year (AY) |
| April 1, 2023 to March 31, 2024 | 2024-25 |
| April 1, 2022 to March 31, 2023 | 2023-24 |
| April 1, 2021 to March 31, 2022 | 2022-23 |
| April 1, 2020 to March 31, 2021 | 2021-22 |
| April 1, 2019 to March 31, 2020 | 2020-21 |
| April 1, 2018 to March 31, 2019 | 2019-20 |
Difference Between Financial Year and Assessment Year
While both terms may appear similar, they have distinct meanings and purposes, especially when it comes to taxation. Let’s look at the key differences between financial year (FY) and assessment year (AY) in a concise manner.
| Financial Year (FY) | Assessment Year (AY) |
| The year in which income is earned. | The year following the financial year when income is assessed and taxed. |
| Used for earning income and calculating tax liabilities. | Used to file the Income Tax Return (ITR) and pay taxes on the income earned in the financial year. |
| Runs from April 1st to March 31st. | Also runs from April 1st to March 31st, but comes after the financial year. |
| Tax is not due in the financial year but must be planned. | Tax is paid in the assessment year based on the income of the previous financial year. |
| Income tax is calculated for the year in which income is earned, not the year it is filed. | Taxes are assessed on the income earned in the previous financial year. |
Why Does the Income Tax Return (ITR) Include an Assessment Year?
Many taxpayers wonder why an assessment year is included in the Income Tax Return (ITR) form. The reason is simple: taxes on the income earned in the financial year cannot be filed until the income has been received. The assessment year allows taxpayers to file their taxes in the year following the one in which income was earned, giving them time to calculate and assess their tax liability.
For instance, if your income is earned between April 1, 2023, and March 31, 2024, you can file your ITR during assessment year 2024-25, which begins April 1, 2024, and ends March 31, 2025.
Read More About How to File Income Tax Returns?
Importance of Financial Year and Assessment Year for Taxpayers
Both the financial year and assessment year are essential for tax planning, as they help taxpayers determine their income and tax liabilities. Understanding these 2 years will help ensure that taxes are paid accurately and on time.
- Tax planning: Understanding the difference between financial year and assessment year helps you plan your taxes better. You can make strategic decisions in terms of investments, tax-saving instruments, and deductions.
- Filing taxes on time: Filing your tax returns within the appropriate assessment year ensures that you comply with tax laws and avoid penalties.
- Tax savings: Planning investments in the correct financial year (FY) allows you to maximise tax-saving options like ELSS (Equity Linked Savings Schemes) or PPF (Public Provident Fund).
Tax Planning Tips for the Financial Year and Assessment Year
- Start planning early: Begin your tax planning at the start of the financial year to make sure you’re on track with your savings and tax strategies.
- Invest in tax-saving schemes: Make use of tax-saving investment options like ELSS, PPF, and National Pension Scheme (NPS) during the financial year.
- Claim deductions: Ensure to claim all eligible deductions (like 80C, 80D, etc.) in the financial year to lower your taxable income.
- File your return on time: File your income tax return during the assessment year to avoid penalties or late fees.
- Review your financial situation: Assess your income at the end of the financial year to determine whether any additional tax needs to be paid.
Conclusion
Understanding the financial year and assessment year is crucial for every taxpayer. These two terms represent distinct phases in the tax cycle. Knowing the difference between financial year and assessment year will help you file your Income Tax Return correctly, plan your taxes effectively, and avoid penalties.
FAQs
When should a taxpayer file an income tax return?
A taxpayer should file their income tax return in the assessment year (AY), which is the year following the closure of a financial year (FY).
How do I calculate my income and tax liability for the purpose of filing an income tax return?
You should calculate your income for the financial year and compute the tax payable on it. The tax return must be filed in the assessment year once your tax liability is determined.
Can I claim credit for TDS, advance tax, or TCS paid or deducted from my income?
Yes, when filing your income tax return in the assessment year, you can claim credit for advance tax, TDS, and TCS paid during the financial year.
Which assessment year should I consider while filing ITR on or before 31st July 2024?
If you’re filing your income tax return on or before July 31, 2024, you will need to file for AY 2024-25 (based on income earned in FY 2023-24).
Is the financial year and the previous year the same?
Yes, the financial year and previous year are the same for income tax return purposes. For instance, FY 2024-25 is also the previous year 2024-25.
