What is the Difference between Assessment Year and Financial Year?

What is Financial Year?

The Financial Year is the calendar year in which money is received. Unlike the regular calendar year, a Financial Year starts on the 1st of April of every calendar year and ends on the 31st of March of the next calendar year. In other words, the year before the Assessment Year is known as the Financial Year, and it is the period in which tax returns are filed. The abbreviation used for the word Financial Year is FY.

For example, any income earned between the 1st of April 2022 and the 31st of March 2023 will be considered under the current Financial Year (FY) 2022-23.

What is the Assessment Year?

The Assessment Year is the year that comes after the financial year. It is the period from the 1st of April to the 31st of March, during which the income earned during the financial year is taxed. In the relevant assessment year, one must file their income tax return. 

For example, for any income earned between the 1st of April 2022 and the 31st of March 2023, the Assessment Year would be 2023-24, that is, during the Assessment Year (AY) 2023-24.

Important Differences between Assessment Year and Financial Year

Financial Year is the year within which income is earned. In other words, the year before the Assessment Year is known as the Financial Year, and it is the period in which tax returns are filed.

Both the Financial Year and Assessment Year end on the 31st of March and begin on the 1st of April. Financial Year is, therefore, the year in which business people, salaried professionals, and senior citizens earn their money. In contrast, the following year is the Assessment Year, where the income that has been previously earned gets evaluated.

Taxation and evaluation are carried out for income that has been earned in the year before AY, which is the financial year. For this reason alone, Income Tax Return Forms are known to use the term AY instead of FY.

While income is always earned in the period known as the financial year, it cannot ever be taxed before having been earned. Hence, it is only after an individual's money has first been earned that it will be evaluated for taxation; the latter takes place during the Assessment Year.

For example, if the Financial Year is from the 1st of April 2021 to the 31st of March 2022, then its term will be known as FY 2021-22. The Assessment Year for the income earned during this period will start after the end of the financial year, that is, the 1st of April 2022 to the 31st of March 2023. This means the Assessment Year for FY 2021-22 will be AY 2022-23.

FY and AY for Recent Years

 Important Things to Know When Filing Tax Returns During Assessment Year

• It is necessary for taxpayers to remember that Assessment Year and financial year are two very different periods when they embark upon the process of filing their tax returns.

• The ITR forms that are issued will always use the term AY, and it is important for taxpayers not to confuse this term with FY.

• The documents that taxpayers refer to in the ITR form, such as Form 26AS, Form 16 A, capital gains statement, and tax deducted at the source or TDS, shall all be for the financial year.

• In fact, FY is used for all the proofs that are submitted for evaluation during the AY.

• Taxpayers always need to bear in mind that income shall get assessed only after the financial year has come to an end.

Important Things to Remember When Filing Taxes During FY

1. Deductions can be claimed without showing receipts

   One of the most important points that ought to be noted by regular taxpayers is that deductions can be claimed in the FY without showing any receipts. For this purpose, taxpayers have to gather as much documented information as possible from people who can vouch for their expenses, keep video records or photo records as well as the dates on which specific items were bought, keep detailed journal entries, diaries, or other forms of written records in addition to the dates on which any services or items were purchased.

2. Organized accounts of expenses must be kept

   An important tax strategy taxpayers can deploy to save money on tax payments in the financial year or FY is keeping organized records of expenses. If receipts are not well organized and that too on time, it is possible on the part of a taxpayer to overlook large deductions that may prove highly damaging for him on the financial front.

3. Tax Payers should get educated about Tax Filing procedures and how they work

   An effective way by which taxpayers can know more about tax payment procedures online and elsewhere is to educate themselves. There are certified courses on taxation offered in local colleges as well as schools that may be undertaken in this regard.

4. Tax Preparation Software can be used for convenient Tax Filing

   Tax preparation software can also be downloaded from the internet for the smooth filing of taxes in FY. This software is free and easy to use and is also free from viruses of any sort. The Free File Program offered by IRS is something that can be availed by taxpayers to go ahead and make their tax payments on time without spending any money at all.

5. Income from deposits should be shifted

   Taxpayers who receive income from fixed or recurring deposits should strongly consider shifting this income to their children's bank accounts if they have any. By doing so, they shall be able to save a huge amount of tax for a specific financial year.

6. Filing Joint Returns should be strictly avoided in FY

   Married couples should consider filing tax returns separately. This is because those who claim tax returns jointly are not likely to save much money upon doing so, and the entire process of filing a joint return might prove to have been done in vain.

Things to Remember When Filing Tax Returns in Assessment Year

1. Transparency is needed when filing Tax Returns

   When Filing Tax Returns during Assessment Year, taxpayers need to make it a point to be as transparent as possible about their past tax payments, the various forms used for filing taxes, and the receipts they received from the Income Tax department after filing taxes online. The receipts and other documents should be organized in one single file and then submitted at the time of filing the returns online.

   If all required documents are in place, such as capital gains tax statements, Form 16A, and Form 26S, then it is more than likely for the tax refunds for a particular Assessment Year to be generated in a timely manner. There are no glitches that are likely to take place in the transfer of tax return funds.

2. Tax Returns should be filed Online

   Taxpayers from all walks of life, including senior citizens and business people, can sit and comfortably file their returns from home when they opt for the E Filing services for tax returns. Filing tax returns online is a quick process, and taxpayers do not have to worry about their tax return filing activities running into several weeks or months when they select the e-filing services made available by the income tax department.

3. Tax Return Calculators ought to be made use of

   • When filing tax returns during an Assessment Year, it would be a good idea for every taxpayer to make use of tax returns calculators that are accessible online.

   • Such tax return calculators may be used for free and generate accurate figures of the tax deductions that may be claimed by individual taxpayers for the income that is earned in a specific financial year.

   • The tax return calculators that are available online are usually updated regularly and can be used quite efficiently on both iPhones and Android phones.

   • Thus, the entire process of filing taxes in the FY and claiming returns in the Assessment Year can be carried out in a highly efficient way, provided taxpayers have a correct understanding of what the two periods of the Financial Year and Assessment Year signify. The financial year always comes before the Assessment Year, with evaluations being carried out in the latter period once income has been earned in the former period.

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