What is the difference Between Assessment Year (AY) and Financial Year (FY)

What does Financial Year mean?

The financial year is the year in which you have earned the income. It starts from 1st April of the calendar year & ends on 31st March of the next calendar year. The term “Financial Year” is also commonly referred to as F.Y.

An assessee is required to calculate and plan taxes for the financial year but income tax return is to be filed in the next year or Assessment Year. For instance,

• The income you earned from 1st April 2021 to 31st March 2022 is the income earned in the current Financial Year (FY) 2021-22. Also,
• Any income earned by you for the period starting from 1st April 2021 to 31st March 2022 can be simply stated as income earned in Financial Year (FY) 2021-22.

What does Assessment Year mean?

Assessment year means the year (from 1st April to 31st March) in which income earned by you in a particular financial year is taxed. You are required to file your income tax return in the relevant assessment year. Assessment year is the year just succeeding the Financial Year. For e.g.

• Income earned in the current Financial Year 2020-21 (i.e. from 1st April 2020 to 31st March 2021) will become taxable in Assessment Year 2021-22 (i.e. from 1st April 2021 to 31st March 2022).
• Income earned in Financial Year 2019-20 (i.e. from 1st April 2019 to 31st March 2020) will become taxable in Assessment Year 2020-21 (i.e. from 1st April 2020 to 31st March 2021).

What does Previous Year mean?

For the purpose of income tax or income tax return, terms financial year and previous year are used interchangeably. So, the financial year (FY) 2020-21 can also be termed as the preceding (previous) year (PY) 2020-21 & the income of such year will become taxable in assessment year (AY) 2021-22.

Some examples of Assessment Year and Financial Year or Previous Year

What is the difference between Assessment Year and Financial Year?

From the tax perspective, a Financial year is the year in which a person earns an income. Assessment year is the year followed by the financial year in which the evaluation of the previous year’s income is done, tax is paid on the same and ITR is filed.

For instance, if we consider the financial year starting from 1 April 2020 to 31 March 2021, then it is known to be Financial year 2020-21. The assessment year begins after the financial year ends, so the assessment year of F.Y 2020-21 would be AY 2021-22.

Why does an ITR form have an Assessment Year?

Income tax forms have an assessment year because the income for any financial year is evaluated and taxed in the following year i.e the assessment year. Income cannot be taxed before it is earned. There are adverse situations that can come up either in the beginning , middle or end of a financial year. Hence, it is made mandatory to select Assessment year while filing income tax returns.