Difference Between Assessment Year and Financial Year

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  • 27 Dec 2023
Difference Between Assessment Year and Financial Year

Key Highlights

  • The assessment year evaluates and taxes income from the previous financial year.

  • AY is when tax returns are submitted, and income undergoes evaluation.

  • Crucial understanding for effective tax obligation handling and financial planning.

The assessment year is the fiscal year in which tax calculations are performed, serving as the period during which income tax liability is evaluated. Spanning from April 1st to March 31st, it starts on the first financial day following the commencement of the financial year. During this timeframe, taxpayers must submit their returns to qualify for available tax benefits or deductions.

A financial year, alternatively referred to as a fiscal year, spans twelve months and serves as the accounting and taxation period for governments and businesses. Commencing on April 1 of a given year and concluding on March 31 of the following year, it involves meticulous tracking of all income and expenses. The purpose is to ascertain the overall profit or loss and determine the corresponding tax obligations. Individual taxpayers are also impacted by the financial year, receiving their Notice of Assessment from the taxation authority at its onset. This document outlines any alterations to tax obligations compared to previous years, enabling individuals to claim eligible deductions or credits.

Difference Between Assessment Year and Financial Year

Financial Year Assessment Year
The financial year is the duration in which income is generated.The subsequent assessment year is the financial year when tax returns are submitted.
Salaried professionals and senior citizens earn their income during the financial year.During the assessment year (AY), the income earned in the financial year undergoes evaluation.
Taxation and assessment are conducted during the assessment year (AY) for the income earned in the financial year.Specialised forms for the assessment and taxation of income earned in the financial year are known as Income Tax Return Forms.
Income is generated exclusively within the timeframe referred to as the financial year and cannot be subject to taxation before it is earned.Once an individual has earned income, it will be assessed for taxation in the subsequent period, which is the assessment year.

Why is there an Assessment Year specified in an ITR Form? The Assessment Year (AY) section in the Income Tax Return (ITR) form specifies the fiscal year to which the taxpayer's reported income corresponds. Essentially, the assessment year signifies the time frame during which any income or gains accrued by the taxpayer need to be disclosed to the Income Tax Department. In India, the financial year spans from April 1 to March 31 of the subsequent calendar year. Consequently, any income earned within this period must be declared in the corresponding assessment year. For instance, if an individual earns income from April 2022 to March 2023, their tax return for that period would fall under AY 2023-24.

Given that individuals may have both ongoing and new investments in a fiscal year, it becomes crucial to differentiate between existing and recent investments in the ITR form. Therefore, the AY section offers clarity regarding which assets and liabilities should be included in a specific tax return filing. It's important to note that even though the Assessment Year on an ITR form aligns with the current financial year, an individual's taxable income may span multiple assessment years. For instance, if someone earns income between April 2019 and June 2020, their income would be taxable under both AY 2020-21 and 2021-22.

Conclusion

Although closely connected, an assessment year and a financial year have different roles. The financial year pertains to the duration when income is earned and expenses are accrued. In contrast, the assessment year is concerned with evaluating and taxing the income earned in the previous financial year. A clear understanding of the differences between an assessment year and a financial year is essential for individuals and companies to effectively handle tax obligations and plan their finances.

FAQs on Difference Between Assessment Year and Financial Year

A financial year is 12 months used for accounting and tax purposes.

The assessment year is the fiscal year following the financial year, used for tax assessment.

The assessment year evaluates the income earned during the financial year for tax purposes.

No, they are distinct periods with the assessment year following the financial year.

Tax returns for a financial year should be filed during the subsequent assessment year.

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