When it comes to taxes and finance, terms like “Financial Year” (FY) and “Assessment Year” (AY) are used very often. But for many people, especially those new to the world of finance, these terms can be confusing. Don’t worry! In this article, we’ll explain the difference between the Financial Year and the Assessment Year in simple terms, so even a 10-year-old can understand.
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Financial Year vs Assessment Year: Key Differences
Now that we know what both Financial Year and Assessment Year mean, let’s compare them and look at the main differences:
| Aspect | Financial Year (FY) | Assessment Year (AY) |
|---|---|---|
| Definition | The year during which income is earned. | The year in which income is assessed for taxes. |
| Duration | Starts on 1st April and ends on 31st March. | Follows the Financial Year, from 1st April to 31st March of the next year. |
| Example | FY 2024-2025 (1st April 2024 to 31st March 2025) | AY 2025-2026 (1st April 2025 to 31st March 2026) |
| Use | Used to track and record income, expenses, and profits. | Used for tax calculation and filing tax returns. |
| Tax Filing | Income earned in this year is assessed in the next year (Assessment Year). | Tax returns are filed in this year for income of the previous Financial Year. |
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What is a Financial Year (FY)?
First, let’s start with understanding what the Financial Year (FY) is.
The Financial Year is the year during which you earn income, spend money, or carry out business activities. It is the year in which you make all your financial transactions. It is also called the fiscal year in some countries. In India, the Financial Year starts on 1st April and ends on 31st March of the following year.
So, for example, if you are working from 1st April 2024 to 31st March 2025, that is your Financial Year. All the money you earn, expenses you make, or profits you earn are counted in this Financial Year.
Example: Financial Year 2024-2025 will start from 1st April 2024 and end on 31st March 2025.
Why Do We Have a Financial Year?
The Financial Year is important because it helps track your earnings, profits, and expenses for a year. It is used to calculate how much tax you have to pay. The government needs to keep track of the money people and businesses earn so it can collect taxes correctly.
What Is an Assessment Year (AY)?
Now that we know about the Financial Year, let’s talk about the Assessment Year (AY).
The Assessment Year is the year after the Financial Year, during which your income from the previous Financial Year is evaluated by the tax department. In simple words, the Assessment Year is the year in which your income from the Financial Year is assessed for tax purposes.
The Assessment Year is used by the Income Tax Department to calculate and determine the tax liability of individuals, businesses, and other entities based on the income earned in the Financial Year.
Example: If you earn money between 1st April 2024 and 31st March 2025 (Financial Year 2024-2025), then the Assessment Year for this income would be 2025-2026.
Key Point: The Assessment Year is always one year after the Financial Year.
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Why is There a Difference Between FY and AY?
You may wonder why the Financial Year and Assessment Year are different. The reason is simple: the government needs time to assess and verify your income before calculating how much tax you owe.
Here’s how it works:
- You earn money during the Financial Year (for example, from 1st April 2024 to 31st March 2025).
- After the Financial Year ends, the Income Tax Department needs time to process and review your income and calculate the tax.
- In the Assessment Year, you file your tax return, and the government assesses your financial activities from the previous year (the Financial Year) and determines how much tax you need to pay.
Example of Financial Year and Assessment Year in Action
Let’s look at an example to better understand how the Financial Year and Assessment Year work.
Suppose you are working in a company in India, and you earn an income during the Financial Year 2024-2025, which is from 1st April 2024 to 31st March 2025. Now, when it’s time to file your income tax return, you will do it in the next Assessment Year, which will be 2025-2026.
- Financial Year: 1st April 2024 to 31st March 2025 (this is the year you earn income).
- Assessment Year: 1st April 2025 to 31st March 2026 (this is the year you file your tax returns for the previous Financial Year).
Importance of the Financial Year and Assessment Year
Both the Financial Year and the Assessment Year play a very important role in managing taxes. Here’s why they are important:
1. For Tax Calculation
As a taxpayer, you need to know that taxes are calculated based on the income earned in the Financial Year. You then need to file a tax return in the Assessment Year. This helps the government determine how much tax you owe.
2. For Record Keeping
Businesses and individuals keep financial records for each Financial Year. This helps them track their income, expenses, and profits. These records are used during the Assessment Year to file accurate tax returns.
3. For Tax Planning
Knowing the difference between the Financial Year and Assessment Year helps in tax planning. You can plan your expenses, investments, and savings based on the Financial Year, which will help you reduce your tax burden in the Assessment Year.
Filing Income Tax Returns
When it comes time to file income tax returns, you need to file for the Assessment Year, not the Financial Year. This is because the Income Tax Department uses the information from the Financial Year to calculate the tax you owe.
Here’s the process:
- During the Financial Year: You earn income, make investments, and spend money.
- After the Financial Year Ends: You gather all your financial records (like salary, expenses, and investments) to prepare your tax returns.
- In the Assessment Year: You file your tax return for the income you earned in the previous Financial Year. The government uses this information to determine your tax liability.
Example: For FY 2024-2025, you need to file your tax return in AY 2025-2026.
Tax Filing Deadline
The deadline to file tax returns is usually on 31st July of the Assessment Year. However, this date can be extended by the Income Tax Department if needed.
For example: For Financial Year 2024-2025, you will have to file your tax returns by 31st July 2025 (the end of the Assessment Year).
Here’s a simple way to remember:
- Financial Year = The year you earn money.
- Assessment Year = The year you file your taxes for the money you earned.
Understanding the difference between these two is essential for managing your taxes and financial planning. So, whenever you hear these terms, you’ll know exactly what they mean and why they matter!
