Have you ever heard assessment year and financial year and wondered what it means and how they differ from each other? The terms Assessment Year (AY) and Financial Year (FY) are key to understand taxes and financial planning in India.
Let’s understand what they are and how they can help you file your taxes in time.
What is a Financial Year?
A Financial Year (FY) is a 12-month period during which income is earned. It starts on the 1st of April of every year and ends on 31st March of the following year. All financial transactions, such as income, investments and expenses, are recorded during this time.
Take for example, FY 2023-24 refers to the period from 1st April 2023, to 31st March 2024. The financial year is used for calculating profits, preparing financial statements, and summarizing the financial health of an individual or business.
Example
If you earned a salary between 1st April 2023 and 31st March 2024, your income falls under FY 2023-24.
What is an Assessment Year?
An Assessment Year (AY) is the year that follows a financial year, during which the income earned in the FY is evaluated and taxed by the Central Board of Direct Taxes (CBDT). Like the FY, the AY spans from the 1st April to 31st March.
Like for example, for FY 2023-24, the corresponding AY is 2024-25. This year is important for taxpayers because they file their income tax returns (ITR) and pay applicable taxes in the AY for the income earned in the previous FY.
Example
If your income was earned in FY 2023-24, you will file your Income Tax Return (ITR) during AY 2024-25.
What are the differences between Financial Year and Assessment Year?
Basis Financial Year (FY) Assessment Year (AY)
Definition Year when income is earned. Year when income is assessed and taxed.
Time Period 1st April to 31st March. 1st April to 31st March (next year).
Purpose It helps in tracking income and financial transactions. Tax returns are filed during AY of the income earned during FY.
Example FY 2023-24: 1st April 2023 to 31st March 2024. AY 2024-25: 1st April 2024 to 31st March 2025.
What is it used? It is used for preparing financial reports. It is used for income tax filings and assessments.
Why are FY and AY different?
The separation between a financial year and an assessment Year AY is deep rooted in the practicality of tax filing. Plus, keeping them separate complies with tax laws. This distinction allows all taxpayers like individuals and businesses sufficient time to file for their ITRs in an efficient manner. Here are the reasons why they kept distinct from each other.
1. Calculate Income Accurately
Income from various sources, such as salary, investments or business profits, is consolidated during the financial year. Once the year ends, taxpayers can compute their total earnings and segregate taxable and non-taxable income without any hassle.
2. Claim Deductions and Exemptions
Investments and savings eligible for tax deductions are usually made during the financial year. In the subsequent assessment year, taxpayers gather and submit relevant proof for these claims. This makes sure that taxpayers can reduce their taxable income efficiently. This timeline reduces errors caused by incomplete or premature filings.
3. Avoid Taxation of Unreceived Income
Tax laws mandate that income must be taxed only when it is earned and accrued. As the exact earnings for a year can only be known after the year ends, the following assessment year provides the time to assess and tax this income correctly.
4. Comply with Due Dates
Many tax-related activities, such as filing ITRs, paying advance taxes or rectifying errors in tax payments, are scheduled during the assessment year. This sequencing avoids overlaps with ongoing financial activities of the year when income is actually earned.
5. Accommodate Unforeseen Adjustments
Throughout the FY, events such as job changes, investments, or losses may occur. The AY serves as a buffer period to adjust for these events, ensuring accurate taxation and compliance.
What are the Reasons to Keep them Separate?
By separating these periods, tax systems maintain order and ensure both taxpayers and income tax authorities have ample time to process and verify financial data. Here are the reasons why:
1. Filing Income Tax Returns
When filing Income Tax Returns (ITR) for the income earned in FY 2023-24, you will select AY 2024-25 in the income tax portal.
2. Advance Tax Payments
If your estimated tax liability exceeds ₹10,000 during the FY, you are required to pay advance tax in installments. For example, advance tax for FY 2023-24 must be paid by 31st March 2024, even though the assessment happens in AY 2024-25.
3. Company Reporting
Businesses prepare annual reports for the financial year, detailing their financial performance. Both investors and government regulators use these reports for further assessments.
Common Misconceptions
Misconception 1: FY and AY are Interchangeable
Many believe FY and AY are synonymous. However, the FY tracks income, while the AY assesses and taxes it.
Misconception 2: Tax Returns Can Be Filed for Any FY
Tax returns must always correspond to the AY. For instance, income earned in FY 2023-24 cannot be taxed in AY 2023-24.
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Wrapping Up
Now that you know all about the financial year and assessment year, complying with tax filing laws will no longer be a hassle. The financial year tracks income generation, while the assessment year ensures accurate tax assessment and filing. Apart from that, understanding the distinction between financial year and assessment year is also essential for effective financial planning.
FAQs
What is the difference between FY and AY?
The FY is the year when income is earned, while the AY is the year immediately following, during which taxes are filed and paid.
Why does the ITR form mention AY instead of FY?
Income tax laws assess income in the year following the FY to ensure accurate computation. Hence, AY is used for filing returns.
How are deductions claimed for a financial year?
Deductions for investments made during the FY are claimed in the AY when filing ITR. For example, deductions for FY 2023-24 are claimed in AY 2024-25.
What is the AY for FY 2023-24?
The AY corresponding to FY 2023-24 is 2024-25.
Can income earned in one AY be reported in another?
No, income must be reported in the AY immediately following its corresponding FY.
What is the financial year for businesses in India?
For all businesses in India, the FY starts on 1st April and ends on 31st March as per the Companies Act, 2013.
What is advance tax and when is it paid?
Advance tax is the tax paid during the FY on estimated income. It is usually paid in installments by 31st March of the FY.
How are TDS and TCS linked to FY and AY?
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) deducted during the FY are adjusted against the taxpayer’s liability in the corresponding AY.
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