Assessment Year vs Financial Year

When it comes to income tax and financial planning, two terms often come up: Assessment Year (AY) and Financial Year (FY). These terms play a crucial role in determining the taxation of an individual or entity's income. However, many people mistakenly use these terms interchangeably, leading to confusion and problems when filing income tax returns. In this article, we will provide a comprehensive explanation of the assessment year and financial year, clearing any doubts and helping you navigate the tax filing process smoothly.

What is a Financial Year?

The financial year refers to the period in which you have earned income. It starts on the 1st of April of a calendar year and ends on the 31st of March of the next calendar year. The term "Financial Year" is commonly abbreviated as F.Y. For example, the financial year 2023-24 started on April 1st, 2023, and will end on March 31, 2024.

During the financial year, you need to calculate and plan your taxes based on the income you earn. However, it's important to note that the income tax return is filed in the assessment year, which is the year following the financial year. For instance, any income earned from 1st April 2022 to 31st March 2023 can be stated as income earned in the financial year 2022-23.

What is an Assessment Year?

The assessment year is the year in which the income you earned in a particular financial year is taxed. It runs from 1st April to 31st March and follows the financial year. When filing your income tax return, you need to do so in the relevant assessment year. For example, income earned in the financial year 2022-23 (from 1st April 2022 to 31st March 2023) will become taxable in the assessment year 2023-24.

To better understand the distinction, let's consider another example. Income earned in the financial year 2021-22 (from 1st April 2021 to 31st March 2022) will become taxable in the assessment year 2022-23. As you can see, the assessment year always follows the financial year.

Assessment and Financial Year in India for Recent Years

To provide a clearer picture, let's take a look at the assessment and financial year in India for the recent years:

The Difference Between Assessment Year and Financial Year

From a tax perspective, the financial year is the year in which you earn income, while the assessment year is the year in which the income is evaluated, taxed, and an Income Tax Return (ITR) is filed. To illustrate this difference, let's consider the financial year from 1st April 2022 to 31st March 2023, which is known as the Financial year 2022-23. Following the financial year, the assessment year would be AY 2023-24.

The reason why income tax forms have an assessment year is that income cannot be taxed before it is earned. It's essential to evaluate income for adverse situations that may arise during a financial year, whether at the beginning, middle, or end. Therefore, selecting the assessment year is mandatory when filing income tax returns.

Frequently Asked Questions

Q: What is the full form of AY?

A: AY stands for Assessment Year. While most taxpayers use the abbreviation AY, it is the accepted term for Assessment Year.

Q: What is the full form of FY?

A: FY stands for Financial Year. It is the accepted term for Financial Year, widely used by taxpayers.

Q: What is the Financial Year 2022–2023 relevant Assessment Year??

A: For the Financial Year (FY) 2022-23, the Assessment Year (AY) 2023-24 will be applicable.

Q: Are the Financial Year and Previous Year the same?

A: Yes, when it comes to filing your Income Tax Return (ITR), the financial year and previous year refer to the same period. For example, the Financial Year 2022-23 is also referred to as the Previous Year 2022-23.

Q: When does the Financial Year end every year in India?

A: In India, the Financial Year ends on the 31st of March every year, and the new financial year starts on the 1st of April.

Q: What is the duration of the Financial Year 2022?

A: The Financial Year 2022 or FY 2022-23 started on the 1st of April 2022 and will end on the 31st of March 2023. Taxpayers earning income in this financial year will have the assessment year 2023-24 applicable to them.

Q: What is the Current Assessment Year?

A: The current assessment year (AY) is 2023-24, which is relevant for the financial year (FY) 2022-23.

Conclusion

Understanding the difference between the assessment year and financial year is essential for proper tax planning and filing income tax returns. While the financial year refers to the year in which income is earned, the assessment year is the year following the financial year in which the income is evaluated and taxed. By keeping these terms clear, you can ensure a hassle-free tax filing experience and avoid any confusion or mistakes. Remember to always file your income tax return in the relevant assessment year to comply with tax regulations.