The Balance Sheet and Income statements of companies across the world are normally prepared for a period of 1 year. However, the date from which this period starts varies from country to country.
In India, this 1 year period starts from 1st April and ends on 31st March. This period in which the income is earned is known as the Financial Year or Fiscal Year. The income tax returns are filed and taxes for a company are usually paid in the next year after the end of the Financial Year. This next year in which the income is assessed to tax is called the Assessment Year.
So in case, the accounts are being prepared for the year starting 1st April 2020 and ending on 31st March 2021, this period would be called Financial Year 2020-21. And this income would be assessed to tax in the next year and this period would be called Assessment Year 2021-22.
The due date for filing income tax returns for a financial year is 31st July/30th Sept of the Assessment Year. Therefore if the income tax returns are being filed for the financial year 2020-21, the due date for filing the income tax returns would be 31st July 2021/30th Sept 2021 as the case may be.
In simple terms, Financial Year is the year in which the income is earned and the assessment year is the year in which the income is assessed to tax and all taxes are paid & tax returns filed. The income tax rules and slab rates which are applied for the assessment year 2021-22 would be the same as the rules for the financial year 2020-21 and so on.
The financial year is usually denoted as F/Y and the assessment year is denoted as A/Y. As the financial year is the year that is previous to the assessment year, the financial year is sometimes also called the Previous Year for Income Tax purposes.
What is Financial Year?
The financial year is the calendar year in which you received your money. It begins on April 1st of each calendar year and ends on March 31st of the next calendar year. The word “financial year” is sometimes abbreviated as “F.Y.” An assessee must measure and plan taxes for the fiscal year, but the income tax return must be filed the next year or Assessment Year.
In simple words, “A Financial Year (FY) is the period between 1 April and 31 March – the year in which you earn an income.”
- The income earned in the present Financial Year (FY) 2020-21 is the income earned from April 1, 2020, to March 31, 2021.
What is Assessment Year?
The assessment year is the period (from April 1 to March 31) during which you are taxed on the money you receive in a given financial year. In the relevant assessment year, you must file your income tax return. The year immediately after the Financial Year is known as the Assessment Year. For instance, if you’re looking for a unique way to express yourself.
In Assessment Year 2021-22, income gained in the current Financial Year 2020-21 (i.e. from April 1, 2020, to March 31, 2021) will be taxable (i.e. from 1st April 2021 to 31st March 2022).
The assessment year (AY) is the year that comes after the FY. This is the time in which the income earned during FY is assessed and taxed. Both FY and AY start on 1 April and end on 31 March. For instance, FY 2019-20 and AY 2020-21 are one and the same.
The Indian Financial Year
In India, the fiscal year starts on April 1 and ends on March 31. AY 2021-22 will be the review year for FY 2020-21. In certain circumstances, the financial year may vary from the previous year.
Examples of Financial Year and Assessment Year
This concept of Financial Year and Assessment Year can be explained with the help of the following examples:-
|Year starts from||Year ends on||Financial Year/ Fiscal Year/ Previous Year||Assessment Year|
|1st April 2020||31st March 2021||2020-21||2021-22|
|1st April 2019||31st March 2020||2019-20||2020-21|
|1st April 2018||31st March 2019||2018-19||2019-20|
|1st April 2017||31st March 2018||2017-18||2018-19|
|1st April 2016||31st March 2017||2016-17||2017-18|
To remove the confusion created by the Financial Year and Assessment Year, the new direct tax code has proposed to remove the concept of assessment year which would help simplify the understanding of taxes for the common man. However, the direct tax code is still a proposal and has not been implemented.
What is the difference between AY and FY?
From an income tax perspective, FY is the year in which you earn an income. AY is the year following the financial year in which you have to evaluate the previous year’s income and pay taxes on it.
For instance, if your financial year is from 1 April 2019 to 31 March 2020, then it is known as FY 2019-20. The assessment year for the money earned during this period would begin after the financial year ends – that is from 1 April 2020 to 31 March 2021. Hence, the assessment year would be AY 2020-21.
Important Differences Between AY and FY
|Financial Year||Assessment Year|
|The financial year is the time period where income is earned.||The assessment year that follows is the financial year and the period in which tax returns are filed.|
|The financial year is when salaried professionals and senior citizens earn their money.||While AY is the time when the income that was earned in the financial year gets evaluated.|
|Taxation and evaluation are carried out in the AY for the income that has been earned in the financial year.||Income Tax Return Forms are specialized forms for the evaluation and taxation of FY income.|
|Income is always earned in the period known as the financial year it cannot be taxed prior to being earned.||After money has been earned by an individual it will be evaluated for the purpose of taxation in the latter, that is the AY.|
Financial Year being followed across the Globe
In India, the 12 months financial year period starts from 1st April and ends on 31st March. However, this is not the case with all the countries and many countries consider a different period of 12 months for the purpose of computation of financial year.
It is not only in India that the financial year does not start on 1st Jan. Different countries start their F/Y during different parts of the year.
Why does an ITR form have AY?
Since income for any particular financial year is evaluated and taxed in the assessment year, income tax return forms have AY. Income earned in a financial year cannot be taxed before it is earned. Scenarios like loss of job, job change, new investments, etc. can come up in the middle or end of the FY. This is why the assessment can start only after the financial year ends. Hence, taxpayers have to select AY while filing their income tax returns.
What is a financial year and assessment year called in Hindi?
The financial year (FY) in Hindi is called वित्तीय वर्ष and assessment year (AY) in Hindi is called निर्धारण वर्ष.
Why does the financial year in India start from 1st April and not 1st January?
Although the exact reason for why the Financial Year starts from 1st April and not 1st Jan is unknown, the following are popularly expected to be the reasons for starting the year from 1st April:-
- India was ruled by the Britishers for more than 150 years. And in the UK, the financial year starts from 1st April and not 1st Jan. And therefore, the same concept may have been applied to India as well by the Britishers and after Independence; the Indian Govt didn’t change this.
- In the many regional calendars like the Hindu calendar etc, the New Year starts in the month of April and this may be a reason why the govt also thought of starting the financial year in the month of April itself. Moreover, the crop season in India also starts in April and ends in March.
- Another reason may be that the months of November and December are considered as Festival Season due to the presence of many festivals like Diwali, Christmas, etc. The Inventory is very fast-moving during this period and it would have been difficult to close the books of accounts during this period. Moreover, employees of many organizations are also on a vacation during this period and it gets difficult to close the books during this period.
The above are reasons are just speculations for the reason why Financial Year starts from 1st April. There is no formal and confirmed reason for the same to date.
Frequently Asked Questions
Q. How do I calculate my income and tax liability for the purpose of filing an income tax return?
Q. How do I pay the tax on my income?