Assessment Year (AY) and Financial Year (FY) are two important terms in income tax and financial planning. They are used to determine the taxation of an individual or entity's income.
The Financial Year (FY) refers to the 12-month period during which an individual or business earns income. In India, the FY starts on 1st April and ends on 31st March of the following year. This period serves as the foundation for tracking and recording income, expenses, investments, and other financial activities. The Assessment Year (AY), on the other hand, is the subsequent 12-month period in which the income earned during the FY is assessed and taxed by the government. For instance, income earned in FY 2023-24 will be assessed and taxed in AY 2024-25.
Understanding the distinction between AY and FY is crucial for tax compliance, financial planning, and accurate reporting. Errors in identifying these periods can lead to filing mistakes or missed deadlines, resulting in penalties or scrutiny. Moreover, these terms help individuals and entities align their financial strategies with tax-saving opportunities, making them essential for both short-term compliance and long-term financial planning. Knowing their implications enables taxpayers to fulfil their obligations while optimising their financial outcomes effectively.
When you start to earn income, you need to become aware of the tax structure in India, so you can pay your taxes and file your Income Tax Returns (ITRs) as per the prevailing tax laws. In this regard, the assessment year and the financial year are two important concepts that you should know about. Let us dive into the meaning of these concepts and discuss the differences between the assessment year and the financial year.
Budget 2024 update
The Budget 2024 introduced several changes in tax slabs and other financial measures aimed at easing the tax burden on individuals and encouraging savings. For individual taxpayers opting for the new tax regime, the following income tax slabs were updated:
- Income up to Rs. 2.5 lakh: No tax
- Income between Rs. 2.5 lakh to Rs. 5 lakh: 5%
- Income between Rs. 5 lakh to Rs. 7.5 lakh: 10%
- Income between Rs. 7.5 lakh to Rs. 10 lakh: 15%
- Income between Rs. 10 lakh to Rs. 12.5 lakh: 20%
- Income between Rs. 12.5 lakh to Rs. 15 lakh: 25%
- Income above Rs. 15 lakh: 30%
Additionally, taxpayers earning up to Rs. 7 lakh can now claim a full rebate under Section 87A, eliminating their tax liability.
In the old tax regime, the standard deduction of Rs. 50,000 continues, while deductions under sections like 80C for investments (up to Rs. 1.5 lakh) and 80D for health insurance remain available.
The Budget 2024 also focuses on streamlining the tax filing process and offering more incentives for investments in green energy and digital infrastructure, boosting economic growth while aiming for a taxpayer-friendly system.
What is the meaning of a financial year?
The financial year (FY) is a period of 12 months during which you earn income, gain profits or endure losses. In India, the financial year begins on April 1 of one calendar year and ends on March 31 of the following calendar year. The FY is divided into four quarters, namely:
- First quarter or Q1, from April 1 to June 30
- Second quarter or Q2, from July 1 to September 30
- Third quarter or Q3, from October 1 to December 31
- Fourth quarter or Q4, from January 1 to March 31
Also read: What is a Hindu Undivided Family
What is the meaning of an assessment year?
The Financial Year (FY) and Assessment Year (AY) are fundamental for tax filing and compliance in India. Both refer to different stages of income generation and taxation.
Assessment Year (AY):
- Definition: It is the year in which the income of the previous financial year is assessed for taxation.
- Duration: It also runs from April 1st to March 31st of the next year.
- Example: Income earned in FY 2023-24 will be assessed during AY 2024-25.
A few other important points about assessment year are mentioned below:
- During the assessment year, taxpayers must file their Income Tax Returns (ITR) and pay any outstanding taxes.
- The deadline to file the ITR is generally July 31st of the assessment year.
- This distinction helps streamline the taxation process and ensures compliance with legal timelines.
The Indian Financial Year
In India, the Financial Year (FY) is a 12-month period used for accounting and taxation purposes. It begins on April 1st and ends on March 31st of the following calendar year. This period is critical for individuals, businesses, and the government to calculate income, profits, and losses, as well as plan for tax filings.
For example, the income earned between April 1, 2023, and March 31, 2024, falls under Financial Year 2023-24. During this time, taxpayers are required to maintain records of their financial activities, including salaries, business profits, investments, and expenditures.
The government uses the financial year as a basis for its budgeting and fiscal planning, ensuring consistency in tax collection and policy implementation. At the end of the financial year, taxpayers prepare to file their Income Tax Returns (ITR), usually by July 31st of the Assessment Year, which follows the financial year. This system helps streamline income assessment and tax compliance across the country.
Also read: What is direct tax code
Differences between an Assessment Year and Financial Year
Having seen the meaning of the assessment year and the financial year and delved into some tax planning strategies for each period, let us see how the two differ. The table below summarises the assessment year vs financial year comparison in detail.
| Particulars | Financial year (FY) | Assessment year (AY) |
| Meaning | The year in which you earn income or profits | The year in which you assess and pay taxes on the income earned in the financial year |
| Period | Spans from April 1 to March 31 of the next year | Follows the financial year and spans from April 1 to March 31 |
| Purpose | To keep track of the financial transactions within this period for tax and accounting purposes | To compute the taxes on the income earned in the FY and file Income Tax Returns (ITRs) |
| Tax filing | No tax filing is done in this period | Tax returns are filed for the income earned in the FY |
Example of Financial Year and Assessment Year Explained
To better understand the assessment year and the financial year, let us look at an example. Consider the financial year from April 1, 2023, to March 31, 2024. The income you earn during this period can be grouped into five heads or categories: salaries, income from house property, business income, capital gains and income from other sources.
This income is then assessed in the assessment year — which spans from April 1, 2024, to March 31, 2025. You will have to pay any self-assessment tax due and file your tax returns by July 31, 2024. Sometimes, the government may extend the due date for filing tax returns.
Also read: Difference Between Income Tax Act and Direct Tax Code
Assessment and financial year in India for the recent years
The following table outlines the assessment year and financial year for some of the past few years. Going through the table should help you better understand the concept of FY and AY.
| Period | Financial Year | Assessment Year |
| April 1, 2024 to March 31, 2025 | 2024 - 2025 | 2025 - 2026 |
| April 1, 2022 to March 31, 2023 | 2022 - 2023 | 2023 - 2024 |
| April 1, 2021 to March 31, 2022 | 2021 - 2022 | 2022 - 2023 |
| April 1, 2020 to March 31, 2021 | 2020 - 2021 | 2021 - 2022 |
| April 1, 2019 to March 31, 2020 | 2019 - 2020 | 2020 - 2021 |
| April 1, 2018 to March 31, 2019 | 2018 - 2019 | 2019 - 2020 |
| April 1, 2017 to March 31, 2018 | 2017 - 2018 | 2018 - 2019 |
| April 1, 2016 to March 31, 2017 | 2016 - 2017 | 2017 - 2018 |
Why does an ITR form have an assessment year?
Every income tax return form clearly specifies the assessment year for which the form is being filed. You can usually find the assessment year at the top right corner of the ITR form.
As you have already seen, the income you earn during any financial year is only assessed and taxed during the assessment year. Mentioning the assessment year on the ITR helps taxpayers easily identify the time period that the tax return covers.
In addition to easy identification, it also prevents taxpayers from mistakenly filing returns for the wrong financial year. Furthermore, it also helps the tax authorities properly organise and process tax returns for the appropriate year.
Also read: Different types of investments
Important things to remember when filing ITR during the FY
Filing an income tax return during a financial year is not possible. In fact, filing an ITR for a particular financial year is only possible once it comes to an end and the assessment year begins. This is because the income you earn in a financial year can only be assessed and taxed during the subsequent financial year (assessment year). Furthermore, the income tax authorities publish online filing tools for a particular financial year only after it ends.
That said, here are some important things you need to consider to make ITR filing easier during the assessment year.
- Maintain proper records
Having an organised record of the various expenses and income can make filing a lot simpler. Therefore, make sure to collect all expense and investment receipts pertaining to the current financial year and categorise them for easy identification. - Update yourself on tax laws and amendments
Every year, the government of India presents the Union Budget in parliament. The budget usually brings about various new tax laws and amendments to existing tax laws. Keeping yourself updated on the tax laws can simplify income tax return filing during the assessment year. - Look for ways to decrease tax payments
Contributing to certain investments, especially those listed under section 80C of the Income Tax Act, can help you reduce your tax liability. However, keep in mind that to reap the benefits of 80C deductions, you must invest on or before the 31st of March of the financial year. - Compare old and new tax regimes
The old income tax regime lets you claim a host of deductions, such as the ones that section 80C of the Income Tax Act offers, but at the cost of higher income tax rates. The new regime, meanwhile, only offers a standard deduction of Rs. 50,000, but with lower tax rates.
Since you cannot file ITRs when the financial year has not ended, you can use this time to compare the old and new tax regimes to determine which is more favourable to you. ITR filing becomes a lot easier during the assessment year when you have clarity on the tax regime.
Important things to remember when filing ITR during the AY
Many taxpayers find filing income tax returns during the relevant assessment year to be stressful. However, with the right approach, you can quickly and easily file your ITRs. Here are some key things you need to keep in mind before starting your journey.
1. Keep documents handy
Gather all your income statements, bank account statements, investment proofs, and expense receipts for the financial year for which you are filing returns. Having all of the documents ready can make the ITR filing process smooth and seamless. It can also minimise the chances of mistakes and erroneous entries, which can lead to severe consequences.
2. Consider using tax preparation software
If you are new to filing income tax returns, consider using tax preparation software instead of the Income Tax India e-filing portal. These programmes often provide guidance, including detailed explanations for every section and category of income. Some software can even flag potential mismatches so that you can correct the mistakes and omissions before filing returns.
3. File early
As the due date for filing income tax returns nears, the Income Tax India e-filing portal usually gets busier by the day. This could potentially lead to glitches that can prevent you from filing your returns on time. Fortunately, you can avoid all of that by filing your ITR at least a month away from the due date. Filing early could also mean getting your income tax refund faster if you are eligible to receive one.
4. Be transparent
When filing income tax returns, you must make sure to declare all of your sources of income. Any discrepancies, whether wilful or ignorant, can lead to serious consequences that can range from a penalty to imprisonment.
5. Check Form 26AS
Form 26AS is a comprehensive statement that shows details of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). It can be accessed by logging into your Income Tax India e-filing account. When filing ITRs, you must ensure that the income you declare matches the amount of income mentioned in Form 26AS.
Why does ITR form have an Assessment Year?
The Income Tax Return (ITR) form uses the Assessment Year (AY) because this is the period when the income earned during the previous Financial Year (FY) is assessed for taxation. The AY follows the FY, running from April 1 to March 31 of the next year. For example, if you earned income during FY 2023-24, it will be assessed and taxed in Assessment Year 2024-25.
Using the assessment year ensures a clear distinction between when income is earned and when taxes are due. During the AY, taxpayers must file their ITR, reporting their income and calculating any taxes owed. This also allows time for taxpayers to gather financial records and file their returns by the usual deadline of July 31st.
The concept of the assessment year simplifies the taxation process, ensuring that income from one year is properly evaluated and taxed in the following year.
Why is the assessment year important?
The Assessment Year (AY) is crucial in taxation as it is the period during which income earned in the previous Financial Year (FY) is evaluated and taxed. It plays a vital role in determining an individual's or entity's tax liability and ensuring compliance with tax laws. During the AY, taxpayers file their income tax returns (ITRs), declaring income, deductions, and taxes paid for the relevant FY.
The AY enables the government to assess tax collections and verify if the correct amount has been paid. It also provides a timeline for taxpayers to claim refunds, if applicable, or address discrepancies. Moreover, the distinction between AY and FY ensures proper record-keeping and simplifies tax administration. For instance, income earned in FY 2023-24 is assessed in AY 2024-25. Understanding the AY helps taxpayers plan better, avoid penalties, and adhere to statutory deadlines efficiently.
Financial year and assessment year in Hindi
In Hindi, the term financial year is written as Vitteya Varsh (वित्तीय वर्ष), with Vitteya meaning financial and Varsh meaning year. In the case of the assessment year, it is written as Nirdharana Varsh (निर्धारण वर्ष), with Nirdharana meaning assessment and Varsh meaning year.
Tax planning tips for the financial year and the assessment year
Here are some tips that can help you with tax planning in the assessment year and the financial year:
- Start your tax planning early in the financial year.
- Invest in tax-saving schemes and assets in the relevant FY.
- Pay any advance tax due within the due dates in the FY.
- Keep the necessary tax documents handy for filing your income tax returns in the assessment year.
- Assess your overall tax liability after the close of the financial year.
- Get to know whether you need to pay any additional income tax or if you are eligible for a refund.
- Pay any additional self-assessment tax due and then file your tax returns.
Why is the assessment year crucial for income tax returns?
The assessment year is crucial for income tax returns as it is the period during which income earned in the previous financial year is evaluated and taxed. Taxpayers file their returns in the assessment year, declaring their income, deductions, and liabilities. The government uses this data to determine tax payable or refunds due.
Understanding the difference between the financial year and the assessment year ensures that taxpayers submit accurate returns and avoid penalties. It helps the authorities maintain a structured timeline for processing returns, audits, and assessments, ensuring compliance with tax regulations.
Key takeaways
- The Assessment Year (AY) is when income earned in the previous Financial Year (FY) is assessed and taxed.
- Taxpayers file Income Tax Returns (ITRs) during the AY to declare income, deductions, and taxes paid.
- It allows the government to evaluate tax payments and identify discrepancies or refunds.
- The AY follows the FY; for example, income earned in FY 2023-24 is assessed in AY 2024-25.
- Understanding AY aids in timely tax compliance, avoiding penalties, and optimising financial planning strategies.
Conclusion
Now that you know the meaning of the assessment year and the financial year as well as the nuances of the FY vs AY comparison, you can plan your investments to maximise your tax benefits easily. Of the many tax-saving investment options available in India, Equity Linked Savings Schemes (ELSS) come with the shortest lock-in period — of only 3 years. So, if you want to save taxes and simultaneously intend to leverage the benefits of market-linked growth and liquidity, these mutual fund schemes may be suitable.
You can invest in ELSS via the Bajaj Finserv Mutual Fund Platform. It is easy for you to compare mutual funds online before making an investment decision. Once you know which ELSS scheme you want to invest in, you can make a lump sum investment or start a SIP in that fund.
