Financial Year and Assessment Year are 2 very crucial terms that taxpayers need to be familiar with in order to be able to file their tax returns in a smooth and hassle-free manner without any confusion. In this post, we will understand both the terms and know the Difference Between Financial Year and Assessment Year.
Meaning of Financial Year in India
In simplest words, a financial year is a year in which you earn income. The Balance Sheet and Income statements of companies across the globe are usually prepared for a period of 1 year. However, the date from which period to which period differs from country to country.
Sometimes a financial year is also called a fiscal year or sometimes a budget year. it also varies from country to country and also depends on the situation.
For Example- If income is earned in May 2020 or says in February 2021, then the financial year for this month is 2020-21 i.e. 1st April 2020 to 31st March 2021 and this period is called “Financial Year 2020-21”.
In tax terms, the financial year is also denoted as “FY”, which simply means Financial Year.
Also Read- Difference between gross total income and total income
Meaning of Assessment Year
The assessment year is a year that comes after the Financial Year. This is the year in which the income earned during Financial Year is assessed and taxed.
For Example- In the above example, The income of this year will be assessed in Assessment Year 2021-22, i.e. next year.
In tax terms, the assessment year is also denoted as “AY”, which simply means Assessment Year.
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Difference between Financial Year and Assessment Year
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 tax on it.
Example- For the period 01.04.2020 to 31.03.2021, the financial year is known as FY 2020-21, in which you earned income and for the same period the AY is 2021-22, in which you assess and pay tax on earned income.
Here is the table to better know the Difference Between Financial Year and Assessment Year.
| Parameters | Financial Year | Assessment Year |
|---|---|---|
| Meaning | In simplest words, a financial year is a year in which you earn income. The Balance Sheet and Income statements of companies across the globe are usually prepared for a period of 1 year. | The assessment year is a year that comes after the Financial Year. This is the year in which the income earned during Financial Year is assessed and taxed. |
| Names | Sometimes a financial year is also called a fiscal year or sometimes a budget year. | The assessment year is assessment year only. |
| FY and AY | In tax terms, the financial year is also denoted as “FY”, which simply means Financial Year. | In tax terms, the assessment year is also denoted as “AY”, which simply means Assessment Year. |
| Hindi Meaning | वित्तीय वर्ष | निर्धारण वर्ष |
| Income Tax | Advance tax is paid in Financial Year | Self assessment tax is paid in assessment year |
| Income | Income is earned in Financial Year | Income is calculated in Assessment Year. |
Also Read- Different types of ITR forms which ITR form should you file
Frequently Asked Question- FAQs
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Is the financial year and previous year is same?
For Income Tax Purpose, there is no difference between financial year and previous year. For period 01.04.2020 to 31.03.2021 the financial year and previous year remain same, i.e. FY/PY- 2020-21
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What is the Difference Between Financial Year and Assessment Year?
Difference Between Financial Year and Assessment Year– 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 tax on it.
Example- For the period 01.04.2020 to 31.03.2021, the financial year is known as FY 2020-21, in which you earned income and for the same period the AY is 2021-22, in which you assess and pay tax on earned income.
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What is the assessment year under Income Tax Act?
The assessment year is a year that comes after the Financial Year. This is the year in which the income earned during Financial Year is assessed and taxed.
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Why does an ITR form have AY?
Income Tax Forms have an assessment year because the Income for any financial year is evaluated and taxed in the following year i.e. assessment year. Income can not be taxed before it is earned. Hence it is mandatory to select an assessment year while filing income tax returns.
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)