A Complete Guide To Financial Year And Assessment Year

We frequently observe people who are puzzled by the distinction between the financial year and the assessment year, regardless of their level of tax experience.  It's critical to comprehend the distinctions between the assessment year and financial year concepts since ambiguity can cause people to make mistakes when submitting their income taxes. 

By understanding the distinction between the assessment year and the financial year, taxpayers can simply avoid making these mistakes. Given how frequently the terms "assessment year," "previous year," and "financial year" appear in income tax legislation, it's beneficial for all taxpayers to understand what they represent. Learn the definitions and significance of these phrases by reading on.

The Financial Year: What Is It?

A 12-month period beginning on April 1 and ending on March 31 of the subsequent calendar year is known as a financial year (FY). When income is earned during this interval, it will be liable to taxes in the subsequent year. A person may receive their wage, incur costs and profits from a business, receive dividend income from mutual funds or realize capital gains on units that have been redeemed, and receive rental income from real estate. You must take into account all of your financial transactions during this time when filing your ITR.

Assessment Year in Income Tax

The period of time during which income received in a given fiscal year is evaluated for tax purposes is known as the assessment year. The assessment year, sometimes known as AY, begins following the conclusion of the relevant fiscal year. Income received during FY 2021–22 will be subject to taxation during AY 2022–23, which began on April 1, 2022, and ends on March 31, 2023.  Understanding the definition of an assessment year is essential when filing an income tax return because the assessment year is when various types of income from the financial year - such as interest, capital gains tax, rental income, salary, gratuities, and other income - are taxed.

Difference between Financial and Assessment Year

The financial year usually comes before the equivalent assessment year in terms of income tax regulations. For instance, the fiscal year 2021–2022 and the assessment year 2022–2023 correspond to each other.

Importance of Assessment Year

The appropriate assessment year must be cited by the taxpayers when making any filings with the income tax department, such as submitting Income Tax Returns (ITRs), paying advance tax, self-assessment tax, etc. Since our ITRs are filed for the relevant assessment year alone, all of our tax records are maintained with regard to that assessment year alone. 

It can be difficult to estimate one's annual income and file taxes in the same year. Therefore, it is expressly stated in income tax legislation that returns must be filed in the assessment year, which is the following year. Taxpayers must, however, additionally pay advance tax on their income during the financial year if their total tax burden surpasses Rs. 10,000 after deducting TDS (Taxes Deducted at Source) and TCS (Taxes Collected at Source). In order to avoid penalties, the taxpayer must estimate their tax liability for the fiscal year and pay their taxes in advance.

If taxpayers fail to make prorated advance tax payments according to the designated payment schedule, they will be liable for interest on the amount of the advance tax shortfall. Tax payments made during the assessment year or any subsequent years are referred to as self-assessment tax, whereas all tax payments made during the financial year are referred to as advance tax. When filing their tax returns and paying their taxes, taxpayers need to remember to include the relevant assessment year. Because the taxes paid for any prior assessment year cannot be deducted from taxes paid for any subsequent assessment year, this spares the taxpayers any difficulties in the future. When making such tax payments, the taxpayer must pay taxes on time and request a refund from the income tax authorities for any excess tax that was paid.

Difference between the Financial Year and Assessment Year

• Income tax is due on the taxpayer's earnings for the fiscal year according to the applicable income tax slab. In the assessment year, revenue from the prior fiscal year is subject to taxation.
• During the FY, income is not subject to tax assessment. Income from the previous fiscal year is evaluated in AY.
• For the money you have already earned and anticipate earning for the balance of the fiscal year, you can pay advance tax during the FY. The tax that remains after TDS and advance tax deductions is the self-assessment tax, which is paid in advance each year.
• To guarantee that tax deductions are claimed, any tax planning must be completed throughout the fiscal year. Investments made during the AY that save taxes will be included in the next fiscal year's tax deductions. 

Conclusion

Understanding the distinctions between the financial year and the assessment year is crucial if you want to make sure you abide by tax laws and guidelines. The assessment year indicates when taxes are due on those incomes, but the financial year shows when money is generated and expenses are incurred.  Understanding the meanings of these terms in combination with one another can make it easier for you to plan your business or investments. Knowing these differences will also guarantee that you pay only what is owed each tax season.