Understanding the Basics: What is a Financial Year and Assessment Year?
In simple words, the Financial Year (FY) is the year in which you earn your income, while the Assessment Year (AY) is the year that follows, in which your income is assessed and taxed by the Income Tax Department. For example, if you earned income between 1st April 2024 to 31st March 2025, that period is your Financial Year 2024-25, and the Assessment Year would be 2025-26. The confusion between these two is common, but the rule of thumb is: You earn in the financial year and file taxes in the assessment year.
Legal Definition Under Income Tax Law
As per Section 2(9) of the Income Tax Act, 1961, Assessment Year means the period of twelve months commencing on the 1st day of April every year immediately following the financial year. In contrast, while the Act doesn’t define “Financial Year” separately, it is implied under Section 3 that the financial year is the 12-month period starting from April 1st to March 31st. This is the default fiscal period for individuals, firms, and companies in India unless stated otherwise. Tax is calculated on income earned during the financial year and filed in the immediately following assessment year.
Why the Distinction Matters
This distinction is vital because all your tax planning, TDS deductions, income reporting, and return filings revolve around these two terms. For instance, Form 16 or your salary slips will mention the FY, but your ITR (Income Tax Return) will always mention the AY. If you confuse the two while filing your return or during audits, it can lead to notices, penalties, or incorrect filings. So, understanding this simple concept goes a long way in keeping your finances in check and tax-compliant.
Mnemonic :
Mnemonic to Remember: “EAT – Earn, Assess, Tax”
Here’s a simple way to never forget the difference:
- E – Earn in the Financial Year
- A – Assess in the Assessment Year
- T – Tax is Paid during the Assessment Year
