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

What is known as a Financial Year?

For the purpose of income tax, the financial year represents the particular year in which the income is earned. The financial year, called FY in short, starts on 1st April and ends on 31st March of the following year. The income that you earn during these dates is subject to tax.

For instance, the income that you earned from 1st April 2021 to 31st March 2022 would be called the income for the FY 2021-22. You would have to file a return on this income in 2022 within the return filing due date.

What is known as an Assessment Year?

In simple terms, Assessment Year, or AY, in short, is the specific year that comes after the end of the financial year in which the Income Tax is assessed. The Assessment Year also starts on 1st April and ends on 31st March. This is the particular year in which the total income that you earned in a financial year is taxed.

The assessment year is always used in relation to the previous financial year.

For instance, if the year from 1st April 2021 to 31st March 2022 is the financial year, the assessment year for this financial year would be from 1st April 2022 to 31st March 2023. In other words, if the financial year is 2021-22, the assessment year would be 2022-23.

What is a Financial Year (FY)?

A financial year, also known as a fiscal year, is a 12-month period used by governments, businesses, and individuals to calculate and report financial statements, income, and taxes. In India, the financial year starts on April 1st and ends on March 31st of the following year. For example, the financial year 2024–25 runs from April 1, 2024, to March 31, 2025. This period is used to assess income earned, calculate tax liabilities, and file income tax returns. It helps in budgeting, planning expenses, and measuring the financial performance of businesses and individuals. The financial year is different from the calendar year, which runs from January to December.

What is known as an Assessment Year (AY)?

An Assessment Year (AY) is the 12-month period following the end of a financial year, during which the income earned in the financial year is evaluated and taxed by the government. In India, the Assessment Year starts on April 1st and ends on March 31st of the next year, just like the financial year. However, the key difference is that the financial year is when you earn income, while the assessment year is when you file returns and pay taxes on that income. For example, if you earned income between April 1, 2023, and March 31, 2024 (Financial Year 2023–24), you will file your tax returns and be assessed for that income in the Assessment Year 2024–25. The AY allows the Income Tax Department to review and verify income declarations.

What is the Indian Financial Year?

The Indian Financial Year (FY) is a 12-month period used for accounting and tax purposes in India. It runs from April 1st to March 31st of the following year. This period is used by individuals, businesses, and the government for calculating income, taxes, and preparing financial statements. The FY is crucial for income tax returns, with individuals and entities required to file returns for a particular financial year in the subsequent Assessment Year. For example, FY 2023-24 refers to the period from April 1, 2023, to March 31, 2024, and tax returns for this period are filed in AY 2024-25.

Assessment and Financial Year list for recent years

Here’s a table showing the assessment year (AY) and financial year (FY) for recent years –

What is the integral difference between FY and AY?

The definition of the assessment and financial years clearly highlight their differences too. Here’s a quick table to check out the primary differences between FY and AY –

What is the integral difference between FY and AY?

Here’s a table that highlights the difference between Assessment Year (AY) and Financial Year (FY):

Importance of Assessment Year (AY) on the ITR Form

The income tax return has mentioned the assessment year because it calculates the tax earned in the financial year. Since the tax is assessed and paid in the assessment year, the AY is mentioned for reference purposes.

What are the Important things to remember during the FY

During the Financial Year (FY), it's essential to be meticulous and organized. Keeping accurate records of income, expenses, and deductions, staying updated with tax laws, and exploring methods to reduce tax liabilities can help you file your returns efficiently and avoid errors. Additionally, comparing old and new tax regimes will ensure you maximize your tax benefits.

Maintain Proper Records

Ensure you maintain accurate records of your income, expenses, investment details, and deductions. Keeping these documents organized will make the process of filing your ITR smoother and help avoid discrepancies during audits. Proper record-keeping also enables easy retrieval of data for future filings.

Update Yourself on Tax Laws and Amendments

Tax laws frequently change, so staying updated is essential for accurate tax planning. Understanding new deductions, exemptions, and income tax rates can help you make informed financial decisions. Regularly check the income tax department’s official website for any updates or amendments that may impact your filing.

Look for Ways to Decrease Tax Payments

Maximize your savings by exploring tax-saving investments and eligible deductions under sections like 80C, 80D, and 80G. Investments in life insurance, PPF, EPF, and NPS, among others, can help reduce your taxable income. Plan your investments wisely within the applicable limits to reduce your overall tax burden.

Compare Old and New Tax Regimes

The introduction of the new tax regime offers reduced tax rates without deductions and exemptions. Compare both regimes to determine which is more beneficial for you. If you have significant exemptions and deductions, the old regime may be more advantageous.

What are the Important things to remember when filing ITR during the AY

When filing your Income Tax Return (ITR) during the Assessment Year (AY), it’s essential to be organized and timely. This period is when your income from the previous Financial Year is assessed for taxation. Being proactive with documentation, using digital tools, and ensuring accuracy can prevent delays, errors, or penalties. Transparency and cross-checking your details with official tax records like Form 26AS help ensure your filing is compliant and complete.

Keep Documents Handy

Collect all relevant documents like salary slips, Form 16, investment proofs, and rent receipts. Having them readily available will make the filing process quicker and smoother, while also reducing the chances of errors. Proper documentation also supports your claims in case of queries from the tax department.

Consider Using Tax Preparation Software

Using reliable tax-filing software can simplify the process and reduce errors. These tools auto-calculate tax liabilities, suggest deductions, and allow e-filing directly. Many platforms also offer expert assistance. This helps especially if you're new to filing or have multiple sources of income.

File Early

Avoid last-minute stress by filing your ITR well before the deadline. Early filing helps you correct any errors, receive refunds sooner, and avoid server issues or penalties. It also gives you time to review details carefully and ensure full compliance.

Be Transparent

Always provide accurate information about your income, investments, and deductions. Concealing or misreporting data can lead to notices, penalties, or scrutiny from the Income Tax Department. Honest reporting builds a strong financial record and avoids future complications.

Check Form 26AS

Form 26AS contains all the tax-related details such as TDS deducted, advance tax paid, and high-value transactions. Always cross-check your tax credit statement with the information you input in your ITR. Discrepancies can lead to delays in processing or refunds.

Why does the ITR form have an Assessment Year?

The ITR (Income Tax Return) form includes an Assessment Year (AY) because this is the year in which the income earned during the previous Financial Year (FY) is evaluated and taxed. For example, income earned from 1st April 2023 to 31st March 2024 (FY 2023–24) will be assessed in AY 2024–25. The AY helps the Income Tax Department track when tax returns are filed and assessments are made. It also enables taxpayers to declare income, claim deductions, and settle tax liabilities for the income earned in the prior financial year.

Why is the Assessment Year important?

The Assessment Year is crucial because it is the period during which your income for the previous financial year is reviewed, and taxes are calculated and collected. All tax filings, refunds, and compliance activities occur during this year. It helps the government determine how much tax you owe and ensures consistency in processing returns. Choosing the correct AY in your ITR form is vital to avoid mismatches or legal issues in your tax records.

Some Tax Planning Tips for the Financial Year and the Assessment Year

During the Financial Year, focus on effective tax planning—invest in tax-saving instruments under Section 80C, maintain proper documentation, and plan salary components like HRA and LTA. Make timely advance tax payments if applicable. For the Assessment Year, ensure accurate filing by gathering all income and deduction proofs, reviewing Form 26AS, and reconciling TDS details. File your ITR early to avoid penalties. Also, consider both old and new tax regimes to see which one offers more savings. Proper planning in both years ensures smoother filing and maximised benefits.

Frequently Asked Questions

1. If I make a tax-saving investment on 1st April 2023, would I be able to claim a deduction in my tax liability for the financial year 2022-23?

   
   

   Since you are making the investment after the financial year ends on 31st March 2023, you would not be able to claim a deduction in the tax liability for FY2022-23. However, this deduction would be allowed in the next financial year, i.e., FY 2023-24, since you made it at the beginning of the next year.

   
   

2. What is the difference between the fiscal year and the financial year?

   
   

   The term ‘fiscal year is used in other countries and represents a calendar year starting from 1st January and ending on 31st December. This represents the financial year for taxation purposes in such countries.

   
   

   However, in India, the fiscal and financial years start on 1st April and end on 31st March.

   
   

3. What is the last date for filing the ITR?

   
   

   The last date for filing the ITR is, usually, 31st July. However, the income tax department might allow extensions to taxpayers in different financial years.

   
   

4. What is the financial year in India?

   
   

   The financial year in India is a 12-month period used for accounting and tax purposes, running from 1st April to 31st March of the following year. For example, FY 2024–25 starts on 1st April 2024 and ends on 31st March 2025. It is the period during which individuals and businesses earn income, make investments, and maintain financial records that will be assessed for taxation in the next corresponding Assessment Year (AY).

   
   

5. How many quarters does a financial year have?

   
   

   A financial year in India is divided into four quarters, each consisting of three months:

   
   
   • Q1: April to June
   • Q2: July to September
   • Q3: October to December
   • Q4: January to March
   
   

   These quarters help businesses and taxpayers track income, expenses, and taxes throughout the year. They are also important for GST filings, TDS payments, and quarterly advance tax payments, making it easier to manage finances in shorter, manageable timeframes.

   
   

6. Why do I need to select an Assessment Year when filing my ITR?

   
   

   When filing your ITR, you must choose the Assessment Year (AY) because this is the period during which your income for the previous Financial Year (FY) is assessed and taxed. The AY helps the Income Tax Department verify and assess the income earned during the relevant Financial Year. and ensures tax filings are correctly categorized. Choosing the wrong AY can lead to errors in return processing, possible rejections, or delays in refunds and may require revised filing.

   
   

7. When does the Financial Year end in India?

   
   

   In India, the Financial Year ends on 31st March. It starts on 1st April and spans twelve months. For example, FY 2024–25 begins on 1st April 2024 and ends on 31st March 2025. After the financial year ends, individuals and businesses begin preparing their income details, deductions, and other relevant documents for tax filing during the next Assessment Year. The financial year-end is crucial for audits, balance sheet finalization, and tax planning.

   
   

8. Is the Financial Year the same as the Previous Year?

   
   

   Yes, in income tax terms, the Financial Year (FY) is often referred to as the Previous Year. It is the year in which income is earned by the taxpayer. For example, income earned in FY 2024–25 will be assessed in AY 2025–26. While “Financial Year” is commonly used for general accounting, “Previous Year” is the term used in the Income Tax Act to refer to the same period for taxation purposes.

   
   

9. What is the current Assessment Year?

   
   

   As of now, the current Assessment Year (AY) is 2025–26. This is the period from 1st April 2025 to 31st March 2026, during which taxpayers will file their income tax returns for the income earned during Financial Year 2024–25. The AY is the year in which the income is evaluated, taxes are calculated, and returns are submitted. It is important to select the correct AY when filing your ITR to avoid errors.

   
   

10. What is the assessment year for FY 2025-26?

    
    

    The income earned during Financial Year (FY) 2025–26, which runs from 1st April 2025 to 31st March 2026, will be assessed in the Assessment Year (AY) 2026–27. This means you will file your Income Tax Return during the period from 1st April 2026 to 31st March 2027. The AY is the year in which income from the previous FY is taxed, refunds are processed, and compliance activities take place.