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Whether you are a new taxpayer or a seasoned one, we often see individuals getting confused between financial year and assessment year. Understanding the difference between the concepts of assessment year and financial year is important as a lack of clarity may lead to mistakes at the time of income tax return filing by taxpayers.
The taxpayers can easily avoid these errors by learning the difference between the financial year and the assessment year. But before getting to the difference, let us understand the meaning of financial year and assessment year individually.
What is Financial Year?
As the name suggests, the financial year is the year during which the income eligible for taxation was earned, meaning the time frame during which individuals earn their income. In India, the financial year, abbreviated as FY, is from 1st April to 31st March the subsequent year. So FY 2022-23 started on 1st April 2022 and will end on 31st March 2023. The income earned during this period under different heads such as Salary, House Rent, Income from other sources will be considered for the purpose of taxation.
Financial year is also called the fiscal year and this is applicable to individual, non-individual (e.g. Hindu Undivided Family, Association of Persons, etc.) and corporate tax payers in India. The filing of ITR (Income Tax Return) for a specific financial year starts only after the specified financial year has ended. So ITR filing for FY 2022-23 can only be done after 31st March 2023.
What is Assessment Year?
Assessment year is defined as the time during which the income earned during a specific financial year is assessed for tax purposes. Abbreviated as AY, the assessment year starts after end of the applicable financial year. AY 2022-23 started on 1st April 2022 and will end on 31st March 2023 and during this period, income earned during FY 2021-22 will be assessed for taxation.
The meaning of assessment year is vital to understand in the context of filing income tax return because the income earned during the financial year under different heads, such as rental income, salary, gratuity, interest, capital gains tax, and also income from other sources, are taxed in the assessment year.
Importance of Financial Year and Assessment Year
To know the concepts if financial year and assessment year better and understand their importance to a tax payer, let’s consider an illustrative example.
For the Financial Year that started on 1st April 2021 and ended 31st March 2022 i.e. FY 2021-22, the applicable Assessment Year started on 1st April 2022 and ended on 31st March 2023 i.e. AY 2022-23. So, if you choose the wrong AY while filing returns, your ITR filing will be rejected by tax authorities.
This means if you select AY 2021-22 at the time of filing ITR, you will be filing income tax returns for the FY 1st April 2020-31st March 2021, and not for 1st April 2021-31st March 2022.
Importance of Financial Year or Fiscal Year
- It's the time during which the government, just like businesses, analyzes their earnings and expenditures.
- During FY, economic and financial objectives are put forth, and methods to achieve them are also set.
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- It sets a timeline for financial documents such as year to date salary slip, Form 26AS and Form 16 to be evaluated from time to time.
- It serves as the timeline for businesses to submit their taxes like GST.
- It is a 12-month period, not exceeding 52 weeks.
Importance of Assessment Year
- Between financial year (FY) vs assessment year (AY), the AY is vital when filing ITR because the actual taxation on income from FY happens during the assessment year.
- Self-assessment tax, the balance tax to be paid on net payable income from FY, is submitted during this time.
- The time frame for AY is also 12 months.
Difference Between Assessment Year and Financial Year
Since we have already understood the primary difference between the assessment year and the financial year, let’s take a closer look at some of the other differences:
Financial Year |
Assessment Year |
Income earned by the taxpayer in the financial year is subject to income tax based on applicable income tax slab. |
The income earned during the previous FY is taxed in the assessment year. |
Income is not assessed for tax during the FY. |
Income earned in the preceding FY, is assessed in AY. |
You can pay advance tax during FY for the income earned till date and expect to earn during the remainder of the FY. |
Self-assessment tax is paid in AY as the tax due to be paid after TDS and advance tax deductions. |
Any tax planning must be done during the FY in order to ensure tax deductions are availed. |
Tax-saving investments made during the AY will become a part of tax deductions for the next financial year. |
FAQs
Q. Is calendar year and fiscal year are the same?
A. In many countries, both the fiscal and calendar year starts on 1st January and ends on 31st December. However, in India, the fiscal year or financial year is from 1st April to 31st March. The calendar year in India is from 1st January to 31st December.
Q. Why is there an assessment year on the ITR?
A. Since money earned in the financial year is taxed in the assessment year, the ITR has AY on it. Also, because ITR deals with taxation, the assessment year is relevant in the context.
Q. What are the important documents to file ITR?
A. You will need your PAN card, bank statements, Aadhar card, Form 16 for Tax Deducted at Source (TDS), Form 26 AS for self-assessment tax, Annual Information Statements, and others.
Q. What to do if the income tax has been paid for the wrong assessment year?
A. If you have done e-filing, you need to reach out to your assessing officer for the correction in the assessment year. You can find your assessing officer by visiting the official income tax filing website. You will also be required to feed in your PAN card details and contact number.
Q. What is the previous year?
A. The previous year is the same as the financial year, as the returns are filed a year after the income year.
Sources:
https://www.ndtv.com/business/income-tax-returns-2020-deadline-income-tax-return-forms-have-assessment-year-heres-why-2399907
https://scripbox.com/tax/assessment-year/
https://groww.in/p/tax/income-tax-return
https://economictimes.indiatimes.com/wealth/tax/difference-between-assessment-year-and-financial-year/what-is-itr/slideshow/92077215.cms
https://economictimes.indiatimes.com/definition/Fiscal-Year
https://groww.in/p/tax/financial-year-and-assessment-year
https://zeenews.india.com/photos/business/itr-filing-for-financial-year-2021-22-10-important-documents-required-to-file-income-tax-return-2490623
https://www.timesnownews.com/business-economy/economy/article/what-is-financial-year-in-india-how-is-it-different-from-assessment-year/574167
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