There is often confusion among taxpayers regarding the distinction between the Financial Year (FY) and the Assessment Year (AY). This misunderstanding can result in errors when filing income tax returns. It is important for taxpayers to understand the difference between these two terms in order to accurately report their financial information to the tax authorities.
FINANCIAL YEAR
A financial year (FY) is a 12-month period that runs from April 1st to March 31st. It is the designated accounting year during which you generate income or accounts are maintained.
ASSESSMENT YEAR
The assessment year (AY) follows the financial year (FY) and is the period during which the income earned in the FY is evaluated and taxed. Both the FY and AY begin on April 1st and conclude on March 31st. For example, for the FY 2023-24, the corresponding assessment year is AY 2024-25
Typically, a company or entity will review accounts based on the financial year (FY), while the Income Tax Department will review based on the assessment year (AY).
Income for a specific financial year is assessed and taxed in the assessment year, which is why income tax return are assigned an assessment year (AY). Income earned in a financial year cannot be taxed until it is actually earned, which is why it is taxed in the following year.
Various situations such as job loss, job changes, new investments, and other factors can arise in the middle or end of the financial year. Additionally, the exact amount of income earned in a financial year cannot be determined until the end of that year. This is why the assessment process can only begin after the financial year has concluded. Therefore, taxpayers must indicate the appropriate assessment year when filing their income tax returns.
Differences between financial year and Assessment year:
| Financial Year | Assessment Year |
| The year in which income is earned by a person | Year in which income for a particular financial year is taxed. |
| A financial year starts from 1st April of a calendar year and ends on 31st March of the next calendar year | Assessment year too starts from 1st April and ends on 31st March. However, assessment year for a specific financial year is the year following such financial year |
| A person can carry out tax planning activities in the financial year i.e. the year in which he earns such income. | Once a financial year ends, the income of the person will be assessed and he will be liable to pay tax. |
