What is a financial year and why does it matter for your taxes?

A financial year is much more than simply a bureaucratic term - it is the spine of India's accounting and tax structure, and controls how you will report income, claim deductions and comply with deadlines. Your understanding of this term is even more important now with the new “Tax Year” concept introduced in the 2025 Income Tax Bill.

What is a financial year?

The financial year (FY), sometimes referred to as the fiscal year, is an accounting period of 12 months in length. So fiscal year 2024-25 coincides with earnings from April 1, 2024 to March 31, 2025.

The calendar year has the common January 1 - December 31 accounting period, but the financial year is intentionally designated to be consistent with standard business cycles, budget cycles for the government, and the timing of major economic activity in India. It is worth noting that your salary, business profits, capital gains, and all other sources of income are all tracked according to fiscal year.

Why does the financial year matter for your taxes?

1. Income reporting and tax calculation

You are required to report all your earnings—whether from salary, business, investments, or property—accrued during the financial year. The government uses this period to determine how much tax you owe. The financial year provides a clear, consistent window for calculating your total taxable income, eligible deductions, and the final tax liability.

2. Filing deadlines and compliance

After the financial year ends, you must file your Income Tax Return (ITR) by the due date, typically July 31st (unless extended). Missing these deadlines can lead to penalties, interest charges, and even scrutiny from tax authorities. For instance, if you earn more than Rs. 5,00,000 and file your ITR after the deadline but before December 31st of the assessment year, you may face a penalty of Rs. 5,000. Filing after December 31st can double that penalty.

3. Deductions and tax planning

Tax-saving investments and deductions—like those under Section 80C (LIC, PPF, NPS), HRA, or home loan interest—are all claimed based on the financial year. If you make an eligible investment on March 31st, it counts for that financial year’s taxes. Miss that date, and you lose the deduction for the year.

4. Budgeting and government planning

The government’s annual budget, which impacts everything from tax rates to public spending, is planned and executed according to the financial year. This period also guides businesses in preparing their financial statements, planning cash flows, and making investment decisions.

5. Assessment year and recent changes

Traditionally, the year after the financial year—called the Assessment Year (AY)—is when your income is assessed and taxed. For example, income earned during FY 2024-25 is assessed in AY 2025-26. However, with the introduction of “Tax Year” in the 2025 Income Tax Bill, the process will be simplified. Tax Year will replace both FY and AY, reducing confusion and aligning reporting and assessment within a single period. Note that this change will come into effect from April 1, 2026 (FY2026-27).

How the financial year differs from calendar year

Many countries have different financial years. For instance, India, Japan, and South Africa follow April–March, while the US government’s fiscal year is October–September.

Consequences of missing financial year-end deadlines

• Late ITR filing: Penalties range from Rs. 5,000 to Rs. 10,000 depending on how late you file, with additional interest on unpaid taxes. For income below Rs 5 lakh, the penalty is up to Rs 1,000.

• Non-filing or underreporting: Penalties can reach 50% of the unpaid tax.

• TDS/TCS delays: Late submission attracts Rs. 200 per day and can escalate to Rs. 10,000–1,00,000.

Understanding the “Tax Year” system

If you start a new business or source of income mid-year, your first Tax Year runs from that date until March 31st, after which you follow the standard cycle.

This change streamlines compliance, reduces confusion, and aligns India’s tax terminology with international standards, making it easier for individuals and businesses to manage their tax obligations.

Practical tips for navigating the financial year

• Track all income and investments: Keep records of all earnings and eligible investments made during the financial year.

• Plan tax-saving investments early: Don’t wait until March—plan your 80C, 80D, and other deductions throughout the year.

• Meet filing deadlines: Mark the ITR due date on your calendar and file early to avoid last-minute hassles and penalties.

• Understand the tax year: With the new system, you only need to remember one period—April to March—for both earning and reporting income.

Conclusion

While the terminology has changed, the relevant financial year is still important. There are various issues from a taxpayer standpoint, which is more than fulfilling the government's requests to submit documents. For you, the taxpayer, this means maximising savings, being compliant to the laws, and ultimately figuring out your financial situation and the patterns that apply to you.

The future toward a simpler system, the Tax Year, should not take away from the habit of registering your financing from April to March, which will stay with you and your tax history. Staying in tune with these cycles means any aspect of your finances will never be a surprise - whether you’re an employee, entrepreneur, or passive investor.