What is an Assessment Year (AY) and Financial Year (FY)?

What is the Assessment year or AY?

The Assessment Year (AY) is the specific period, from 1 April to 31 March, in which you are required to file your income tax return based on the money you earned during the corresponding Financial Year. It is the year immediately following the Financial Year.

For example, in Assessment Year 2023-24, the income received during the Financial Year 2022-23 (from 1 April 2022 to 31 March 2023) will be subject to taxation. During the Assessment Year 2023-24, which spans from 1 April 2023 to 31 March 2024, you need to report and pay taxes on the income earned in the previous Financial Year 2022-23.

Here is a table showing the Financial Year and Assessment Year in India from 2018 to 2025:

Please note that the Financial Year represents the period in which income is earned, while the Assessment Year is the year in which the income is assessed, and taxes are filed.

What are the major differences between the financial year and the assessment year?

The main difference between Financial Year and Assessment Year lies in their respective functions and timelines.

The Financial Year refers to the period in which income is earned by an individual or organization. It is the year during which salaries, profits, or any other forms of income are generated. For example, the Financial Year 2023-24 starts on 1 April 2023, and ends on 31 March 2024.

On the other hand, the Assessment Year follows the Financial Year. It is the year immediately after the Financial Year in which the income earned during that period is assessed, taxed, and income tax returns are filed. In other words, the Assessment Year is the period when the previous year's income is evaluated for tax purposes. Using the example above, the Assessment Year would be 2024-25.

During the Assessment Year, taxpayers calculate their tax liability based on the income earned in the preceding Financial Year. They file their income tax returns for the Financial Year in the corresponding Assessment Year. The income tax return forms are specifically designed for the assessment and taxation of the income earned in the Financial Year.

Here's a table highlighting the differences between the Financial Year (FY) and Assessment Year (AY):

Please note that the Financial Year is the period when income is earned, while the Assessment Year is when the income earned in the Financial Year is evaluated and subjected to taxation.

Why is there an Assessment Year on the ITR form?

The ITR form includes an Assessment Year because the taxation of income earned during a particular financial year is done in the subsequent year. This is because income cannot be taxed until it has been received. Adverse circumstances or changes in financial situations can occur at any point during the financial year, whether it is at the beginning, middle, or end. Therefore, when filing income tax returns, it is necessary to select the appropriate Assessment Year to ensure accurate calculation and taxation of income.

When filing tax returns during the assessment year, there are important points that taxpayers should keep in mind:

1. Differentiating between Assessment Year (AY) and Financial Year (FY): It is crucial for taxpayers to understand that AY and FY are distinct periods. The ITR forms provided will always refer to the term AY, and it should not be confused with FY.

1. Relevant documents and proofs: The documents referenced in the ITR form, such as Form 26AS, Form 16A, capital gains statement, and TDS (tax deducted at source), pertain to the financial year. These documents serve as evidence for evaluation during the AY.
2. Assessment after the financial year: It is important to remember that income is assessed only after the completion of the financial year. The AY is the period in which the assessment of the income earned in the previous financial year takes place.

By keeping these factors in mind, taxpayers can navigate the process of filing tax returns during the assessment year more effectively.