Financial Year (FY) and Assessment Year (AY) – Key Differences Explained

This difference is quite fundamental and important to the taxpayers, business owners, and any other finance professional. For some time now, the two terms, FY and AY, have been used interchangeably; however, this is only on paper or books because, in all other related matters such as taxation or financial reporting, their differences are quite evident. This article seeks to attempt to analyse the differences of financial year and assessment year: their purposes, timelines, and relevance to different stakeholders.

What is a Financial Year?

A financial year, or FY, is the period in which an individual or a business earns income. It is also the period during which companies prepare their annual financial statements, including profit and loss statements, balance sheets, and cash flow statements. Determination of the fiscal year by a company is of great importance to evaluate the financial performance of the company, allocate resources, and plan future investments. For those interested in securing financial stability, considering long-term savings plans can be beneficial.

It varies significantly between different countries and is quiet in most. For example, the financial year in India usually starts from April 1 to the next March 31. As such, for example, FY 2023-24 will run between April 1st 2023, through March 31, 2024. The financial year is important not only for a business but also for an individual since it is the period during which income is earned and financial transactions carried out.

What is an Assessment Year (AY)?

The assessment year would be the following year from the financial year. Assessment year is the year when a person or business submits their income tax return. Individuals as well as businesses submit the return under the income tax return filed in the assessment year with respect to the income gained in the previous financial year. Therefore, income from the financial year is liable to tax in the assessment year. For financial planning related to tax and income security, exploring options like the PNB MetLife Guaranteed Future Plan could be useful.

An instance is as follows: Assume the financial year is 2023-24; thereby, the corresponding assessment year would be 2024-25. The income earned for FY 2023-24 would be considered and would subsequently be submitted for tax return purposes in the AY 2024-25. Taxing authorities consider the returns made by a taxpayer in an assessment year to determine if the due amount of tax has indeed been paid.

Why do financial and assessment years have to be different?

The main reason for the financial year and the assessment year is to allow sufficient time to individuals and businesses for the preparation and filing of income tax returns. Taxpayers need sufficient time following the close of the financial year to gather their financial information, compute their tax liability, and file their returns.

This also gives the tax authorities a grace period in which they can examine the income tax returns to ensure that the right amount of tax has been paid. Additionally, for those interested in securing a financially stable future, products like the PNB MetLife Super Saver Plan provide options for planned savings and future security.

Differences Between Financial Year and Assessment Year

Although both of these are interrelated, these serve two different purposes. This is how the main difference between the two terms exists:

1. Definition
   • Financial Year (FY) - It is the calendar year in which the income gets earned.
   • Assessment Year (AY) - That is the calendar year or fiscal year in which incomes get assessed and get charged with taxes.
2. Time Period
   • Financial Year: Starts from April 1 of one year up to March 31 of the following year.
   • Assessment Year: This is the year next to the financial year, starting from April 1 of the following year up to March 31.
3. Purpose
   • Financial Year: This is basically a year for financial reporting, business planning, and accounting of income and expenses.
   • Assessment Year: That is the year when a person is supposed to lodge his income tax returns for assessment and pay taxes for any income he has earned over the financial year.
4. Relevance to Taxpayers
   • Financial Year It is the year in which a taxpayer earns income and spends expenditure. It also becomes a basis for which account-keeping of finance is undertaken.
   • Assessment Year: Income that is earned in a specific year needs to be accounted for in the tax return filed by the taxpayer in the assessment year.
5. Return Filing
   • Financial Year:The basis for preparing tax returns, therefore, is not the Financial Year, but the income earned during such a year is the premise for calculation of taxes.
   • Assessment Year: For the purposes of Income Tax Returns, payment of taxes and tax assessments, the basis is the Assessment Year.

Importance of Understanding Financial and Assessment Years

For taxpayers, if they understand the difference between the financial year and the assessment year, they will not miss the deadline for paying tax returns. Otherwise, delays in submitting tax returns may attract penalty charges and extra interest charges or may even lead to legal complications.

For businesses, a financial year is very important for preparing and presenting the statements of financial position that depict the health of their finances. It is the period during which companies make strategic decisions about investments, resource utilisation, and performance review. The assessment year is important for tax obligations and being compliant with the tax law.

Knowing whether you are a taxpayer, a business person, or a finance expert can make handling your financial responsibilities better because you understand the importance of both the financial year and the assessment year. These two concepts are different from one another in terms of usage and purpose. Differences between these terminologies will help effectively plan to ensure that the financial year as well as a valuation year incorporates receipt of income and financial transactions occur while, during the latter part of the former, the assessment for taxation would occur along with the tax return.