What Is the Financial Year and Assessment Year in Taxation?

In the context of taxation in India, the terms Financial Year (FY) and Assessment Year (AY) play a crucial role in determining the tax cycle. These concepts are vital for taxpayers when filing their income tax returns and calculating their tax liabilities.

Financial Year (FY)

Definition:

The financial year refers to the 12-month period during which a taxpayer earns income. It is the year in which you generate your income and incur expenses.

Duration:

The financial year in India runs from 1st April to 31st March of the following year. For example, FY 2024-25 will run from 1st April 2024 to 31st March 2025.

Role in Taxation:

The income earned during the financial year is used for the purpose of filing tax returns and determining tax liabilities.

Assessment Year (AY)

Definition:

The assessment year is the year immediately following the financial year. It is the year in which the income earned in the financial year is assessed by the tax authorities to calculate and collect taxes.

Duration:

The assessment year starts from 1st April of the year immediately following the financial year and ends on 31st March of the subsequent year. For example, the assessment year for FY 2024-25 would be AY 2025-26, which runs from 1st April 2025 to 31st March 2026.

Role in Taxation:

In the assessment year, taxpayers file their income tax returns based on the income earned during the previous financial year. The income is assessed, and the tax authorities calculate the tax payable.

Relationship Between Financial Year and Assessment Year:

• The financial year (FY) is the year when you earn your income.
• The assessment year (AY) is the year when the income earned in the financial year is assessed and taxed.
• The tax return for a particular FY is filed in the corresponding AY.

For example:

If you earned income between 1st April 2024 and 31st March 2025 (FY 2024-25), you would file your income tax return for this period in AY 2025-26, which runs from 1st April 2025 to 31st March 2026.

Example:

Income Earned in FY 2024-25:

Let's assume an individual, Mr. Kumar, earns ₹10,00,000 in the financial year 2024-25.

Mr. Kumar needs to file his tax return in AY 2025-26, which corresponds to the assessment of income earned in the FY 2024-25.

In AY 2025-26, his income will be assessed, and the tax authorities will calculate how much tax Mr. Kumar is liable to pay based on his earnings in FY 2024-25.

Why These Terms Matter for Tax Filing:

Filing of Income Tax Returns:

You file your income tax return in the assessment year (AY) for the income earned in the financial year (FY).

For example, for income earned between 1st April 2023 and 31st March 2024 (FY 2023-24), you must file the tax return in AY 2024-25.

Tax Calculation:

The income earned in the financial year is assessed during the assessment year to determine the final tax liability.

Conclusion:

Understanding the difference between financial year (FY) and assessment year (AY) is essential for accurate tax filing and ensuring compliance with income tax laws. The income earned in one financial year is evaluated in the following assessment year to calculate and pay the due taxes.