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Understanding how income is taxed in India starts with knowing two commonly used terms: Financial Year (FY) and Assessment Year (AY). While they may sound similar, they serve very different purposes in the income tax process. Every time you earn income, invest, or file an Income Tax Return (ITR), these two terms play a crucial role in determining when your income is recorded and when it is taxed.
Many taxpayers often get confused while selecting the correct year on tax forms, which can lead to filing errors or delays. That’s why the terms assessment year and financial year are crucial forthe domain of finance and the economy. Every earning individual in India should have clarity of the meaning behind these two words. In addition, a grasp of taxation terminology can help us better understand the nitty-gritty of financial control and reporting. In this guide, we break down the meaning of FY and AY, explain how they are connected, and show why understanding them is important for hassle-free tax filing in India.
Key Takeaways
AY ≠ FY: Income is earned in the Financial Year and taxed in the Assessment Year
The Current Assessment Year (AY) is 2025–26 for income earned in FY 2024–25
Both salaried and business individuals must understand the AY–FY difference to file returns correctly
The previous year is just another name for the financial year in tax terms
ITR forms always mention the Assessment Year (AY) because that’s when your tax is actually assessed
What are Financial Year & Assessment Year in Finance & Economics?
Finance is pivotal for both organisations and individuals. Financial management is the science that deals with financial management and control. In today’s age of interconnectivity, economic fluidity, and widespread monetary digitalisation, financial control has gained a new level of precedence. Similar to financial control, the reporting of finances is also equally important. What is financial reporting? Let us find out.
Financial reporting involves documenting and communicating financial activities and performances over specific periods, usually on a quarterly or yearly basis. Organisations, institutions, companies, and even countries use accounting data and report on the current financial status of a cohort. Financial reports are pivotal to making economic predictions, determining the future profitability of an economy, gauging the current economic status, and much more. Some of the steps involved in financial reporting are:
Tracking of cash flow
Evaluation of assets and liabilities
Analysing shareholder equity
Measuring profitability
Now that we know the basics of financial control and reporting, let us delve into two of its essential elements – assessment year and financial year, and their veritable differences.
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Assessment Year: Meaning
An assessment year (1st April to 31st March) can be defined as a stipulated timeframe wherein the income you earn in one financial year is taxed. Thus, you must file your income tax return in the relevant assessment year, which is the year succeeding a financial year. For instance, the income you earned in the current financial year 2024-2025 will be taxable in the Assessment Year (AY) 2025 – 2026.
Financial Year: Meaning
In simple terms, a financial year (FY) refers to the 12-month period during which you earn income and record your financial activities for tax purposes. A financial year starts on the 1st of April and ends on the 31st of March of the following calendar year. For instance, the income you earn from 1st April 2024 to 31st March 2025 is earned in the Financial Year (FY) 2024-2025.
Did You Know?
The Income Tax Department uses the AY to review and assess tax filings for the FY. That’s why your ITR forms always mention the AY
Source: Tax2win
What is the Previous Year?
For income tax returns, we use the terms' financial year and previous year interchangeably. Thus, the financial year 2022 to 2023 can be alternately called the previous year (PY). The income of one financial year or the previous year is taxable in the assessment year (AY) 2023 to 2024.
To avoid any confusion while filing taxes, it is important to understand the difference between the assessment year, the financial year, and the previous year. These terms are closely linked but serve different purposes in taxation.
Period
Financial Year
Previous Year
Assessment Year
1 April 2019 to 31 March 2020
2019 to 2020
2019 to 2020
2020 to 2021
1 April 2020 to 31 March 2021
2020 to 2021
2020 to 2021
2021 to 2022
1 April 2021 to 31 March 2022
2021 to 2022
2021 to 2022
2022 to 2023
1 April 2022 to 31 March 2023
2022 to 2023
2022 to 2023
2023 to 2024
1 April 2023 to 31 March 2024
2023 to 2024
2023 to 2024
2024 to 2025
1 April 2024 to 31 March 2025
2024 to 2025
2024 to 2025
2025 to 2026
Difference between Assessment Year and Financial Year
For tax purposes, a financial year is a year when a person earns an income, whereas an assessment year is a year that follows the financial year. It is during the assessment year that the previous year’s income is taxed. Let us understand the difference between the assessment year and the financial year with the help of a table.
Financial Year
Assessment Year
It is the period when a person earns an income
It is the year that comes next to the financial year, and the period wherein tax returns are filed
During the financial year, salaried persons and senior citizens earn their income
During an assessment year, that income is taxed by the IT department
The money earned in one financial year cannot be taxed in that same period
After a person earns money in one financial year, it is evaluated in the next term, known as the assessment year for taxation
What is the Current Assessment Year?
The current Assessment Year (AY) is AY 2025-2026, which is the year when income earned in the Financial Year (FY) 2024-2025 (April 1, 2024, to March 31, 2025) is assessed for taxation, with income tax returns typically filed during this period.
Why do ITR Forms have Assessment Years?
As the revenue for one financial year is calculated and taxed in the next year, that is, the evaluation year, income tax forms include an assessment year.
Since tax cannot be charged on income before it is actually earned, the government allows the entire financial year to conclude before assessing it. Income levels can change at any point during the year due to unexpected situations; selecting the correct assessment year becomes essential while filing your income tax return.
Glossary
Financial Year (FY): The 12-month period during which income is earned
Assessment Year (AY): The 12-month period following the FY, during which the income earned in that FY is assessed and taxed
Previous Year: A tax term used for the financial year in which income is generated
ITR Assessment Year: The year selected in income tax returns when earned income is evaluated by the authorities
FY Certificate Meaning: FY mentioned on documents indicates the period to which the income or transactions relate
FAQs
AY stands for Assessment Year, and FY stands for Financial Year.
The assessment years and financial years start in India on the 1st of April of one calendar year and end on the 31st of March of the following calendar year.
The current assessment year in India is 2025 to 2026.
A taxpayer should file an income tax return in the assessment year (AY). For instance, for the income earned in the financial year 2021 to 2022, you will file your income tax in the AY 2022 to 2023.
The financial year in India begins on 1 April and ends on 31 March of the following calendar year.
The FY mentioned on certificates shows the income period to which the salary, investment, or transaction belongs.
Yes. The income year (or previous year) is when income is earned, while the year of assessment in taxation is when it is taxed.
While filing an ITR, you select the ITR assessment year because that is when the Income Tax Department evaluates your income.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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