Difference Between Assessment Year (AY) and Financial Year (FY)

What is Financial Year?

The financial year is the year in which you have earned the income. It starts on the 1st of April of the calendar year & ends on the 31st of March of the next calendar year. The term “Financial Year” is also commonly referred to as F.Y. For example, the financial year 2024-25 started on April 1st, 2024, and will end on March 31, 2025.

An assessee is required to calculate and plan taxes for the financial year, but an income tax return is to be filed in the next year or Assessment Year.

New Income Tax Bill Update: The proposed Income Tax Bill 2025 introduces a key terminology change. It replaces "Assessment Year" and "Previous Year" with "Tax Year" and "Financial Year." This shift aims to make tax laws easier to understand.

What is Assessment Year?

Assessment year means the year (from 1st April to 31st March) in which income you earn in a particular financial year is taxed. You are required to file your income tax return in the relevant assessment year. The assessment year is the year just succeeding the Financial Year. E.g.,

• Income earned in the current Financial Year 2023-24 (i.e., from 1st April 2023 to 31st March 2024) will become taxable in Assessment Year 2024-25 (i.e., from 1st April 2025 to 31st March 2026 ).

Assessment and Financial Year in India for the Recent Years

What is the difference between Assessment Year and Financial Year?

From the tax perspective, a Financial year is a year in which a person earns an income. On the other hand, The assessment year is the year followed by the financial year in which the previous year’s income is evaluated, tax is paid on the same, and an Income tax Return (ITR) is filed.

For instance, if we consider the financial year from 1 April 2022 to 31 March 2023, it is known to be the Financial year 2022-23. The assessment year begins after the financial year ends, so the assessment year of FY 2024-25 would be AY 2025-26.

Why does an ITR form have an Assessment Year?

Income tax forms have an assessment year because the income for any financial year is evaluated and taxed in the following year, i.e., the assessment year. Income cannot be taxed before it is earned. Adverse situations can come up either at the beginning, middle, or end of a financial year. Hence, it is made mandatory to select the Assessment year while filing income tax returns.

Things to Remember While Filing ITR During the AY

You must remember the following while filing ITR during the AY -

• Maintain Accurate Records: Organize all financial documents, including income statements, expense receipts, and investment proofs, from the Financial Year (FY). This organization facilitates accurate reporting and can expedite the filing process.
• Stay Informed on Tax Laws: Tax regulations may change annually. Review the latest amendments and updates to ensure compliance and to take advantage of any new deductions or benefits.
• Select the Appropriate ITR Form: Different ITR forms apply to various income sources and taxpayer categories. Choosing the correct form is essential for accurate filing. For instance, ITR-1 (Sahaj) is typically used by salaried individuals with income up to ₹50 lakh, while ITR-2 is suitable for those with additional income sources such as capital gains.
• Adhere to Filing Deadlines: Timely submission of your ITR is crucial to avoid penalties. Generally, the deadline for individuals is July 31st of the Assessment Year. However, it's advisable to verify the specific due dates annually, as they may vary.
• Verify Pre-Filled Information: When filing electronically, the Income Tax Department may provide pre-filled data based on previous returns and available information. Ensure all pre-filled details are accurate and update any discrepancies to reflect your current financial situation.
• E-Verify Your Return: After submitting your ITR, complete the e-verification process within 120 days to validate your filing. This step is essential for processing your return and any potential refunds.

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