What is the Difference Between Financial Year and Assessment 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.

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.

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.

• 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.
• 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.

• 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.

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: