Difference Between Assessment Year (AY) and Financial Year (FY)

Filing taxes can often feel daunting if you're unfamiliar with tax regulations and different sections of the Income Tax Act. Moreover, the difference between the assessment year and the financial year can further confuse taxpayers.

As a result, even a small error can lead to incorrect tax filing, which can result in potential penalties and incorrect tax implications. This is why it is crucial to understand the difference between a financial year and an assessment year to file your taxes without any hassle.

What is a financial year (FY)?

A financial year is the 12-month period during which you earn income. It starts on 1st April during the current calendar year and ends on 31st March next year. When filing taxes, you must consider any income generated between these months.

For example, income earned from 1st April 2024 to 31st March 2025 falls in FY 2024-25.

What is an assessment year (AY)?

The assessment year is the 12 months after the financial year during which your income generated in the financial year is taxed. Like FY, AY also starts on 1st April and ends on 31st March.

For example, the assessment year for income earned in 2024-25 will be 2025-26. Therefore, filing your income tax returns (ITR) in the relevant AY is essential.

Understanding assessment year vs financial year

While FY and AY start and end during the same 12-month period - 1st April to 31st March, they are not the same. Here is a simple way to understand the financial year and assessment year difference:

- The financial year is the year during which you receive the income.

- The assessment year comes right after the financial year, during which the income you generated in the financial year is assessed and tax is collected.

Recent financial years and assessment years

Importance of AY in the ITR form

The Income Tax Department considers separate years as the financial year and the assessment year as the total income earned during an FY cannot be taxed before it is earned. Moreover, predicting an individual's annual income may be impossible due to job changes, new income sources, etc. This is why your entire revenue during a year is taxed in the next year.

To Sum Up

Understanding the difference between an assessment year and a financial year is crucial to file your taxes accurately and on time. While FY is the year you earn your income, AY is the next year during which your income is taxed.

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