One of the most confusing aspects of the Indian taxation system is the difference between the assessment year and the financial year. Whether you are a taxpayer or just someone curious about the Indian taxation system, understanding the nuances between these two terms is crucial. In this blog, we will explore the difference between the assessment year and the financial year, their significance, and how they impact taxpayers in India.
Understanding the difference between an assessment year and a financial year is necessary for any taxpayer. However, when it comes to the discussion around the topic, assessment year vs financial year, many find it a little confusing because of the subtle differences between the two.
A financial year begins from April 1st of a calendar year to March 31st of the next calendar year. For example, the financial year 2022-23 started on April 1st, 2022 and will end on March 31st, 2023.
For accounting purposes, the income earned by an individual, a business, or an organisation in India during a financial year is considered to be their income for the year.
The assessment year is when income tax is calculated for the income earned during the previous year. The assessment year follows the end of the previous financial year, which runs from April 1st to March 31st. For example, the assessment year for the financial year 2021-2022 is 2022-2023. During the assessment year, taxpayers must file their income tax returns and pay any tax owed, based on their income for the previous financial year.
While the difference between a financial year and an assessment year is quite nuanced, having a clear understanding of the two is necessary. To put it simply, while the financial year is the period during which you earn your income, the assessment year is when your tax liabilities are calculated for that particular financial year.
For instance, if a person earns income in the financial year 2021-2022 (i.e., between April 1st, 2021, and March 31st, 2022), then the assessment year for that income would be 2022-2023.
A taxpayer’s tax liability is calculated based on the income tax rates applicable for the assessment year in question. These rates are set by the government and may be revised occasionally. The government has created several provisions under the Income Tax Act 1961 and its later amendments to ensure that a tax paying entity can maximise their tax savings without avoiding their tax obligations.
The assessment year determines the timeline for filing tax returns and is crucial for taxpayers eligible for refunds or for clearing tax dues, if any. The assessment year is also significant in determining the penalty and interest charges taxpayers may incur for not filing their tax returns on time or paying taxes after the due date.
|Financial Year||Assessment Year|
|Definition||The financial year runs from April 1st to March 31st of any given year.||The assessment year is the year that follows a particular financial year.|
|Recording & taxation||For accounting purposes, it is considered to be the period during which you earn your income from various sources (for that particular year).||The income earned during a financial year is evaluated for taxation purposes in the following assessment year. This is the period during which you are expected to settle your tax obligations for the associated financial year.|
|Example||The current financial year 2022-23, started from April 1st, 2022, and will run until March 31st, 2023.||The assessment year for the financial year 2022-23 is AY 2023-24.|
The Income Tax Act 1961 and other tax laws in India are designed based on the financial year. For example, the income tax returns for a financial year must be filed by July 31st of the following year.
The Indian government presents its annual budget for the upcoming financial year in February. The budget outlines the government’s spending plans, revenue projections, and policy initiatives for the coming year.
The importance of the financial year in India lies in its role in determining the tax liability of individuals and businesses. The income tax department of India uses the financial year to assess the income and taxes payable by individuals and companies.
The financial year is followed in India for several reasons. It helps streamline individuals’ and companies’ accounting and tax reporting processes, making it easier for the government to track and regulate financial activities. It also helps in efficient budgeting and planning for the government.
The financial year begins on April 1st and ends on March 31st.
The table below shows the financial year vs assessment year for five years.
|Period||Financial year||Assessment year|
|1 April 2022 to 31 March 2023||2022-23||2023-24|
|1 April 2021 to 31 March 2022||2021-22||2022-23|
|1 April 2020 to 31 March 2021||2020-21||2021-22|
|1 April 2019 to 31 March 2020||2019-20||2020-21|
|1 April 2018 to 31 March 2019||2018-19||2019-20|
While an assessment year and a financial year are closely related concepts, they serve distinct purposes. The financial year refers to the period in which an income is earned and expenses are incurred. On the other hand, the assessment year refers to the year the income earned during the preceding financial year is assessed and taxed. Having a clear idea about an assessment year vs a financial year is crucial for individuals and businesses to manage their tax liabilities and plan their finances effectively.
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The year before the assessment year is called a financial year. The assessment year is when the tax liability for a particular financial year, including earnings and expenses, is evaluated.
A taxpayer should file an Income Tax Return (ITR) by the due date specified by the Income Tax Department, which is usually July 31st of the assessment year for individuals and businesses who are not required to get their accounts audited and October 31st of the assessment year for those who are required to get their accounts audited.
Yes. The previous year and financial year refer to the same period of 12 months, i.e., the period in which income is earned and expenses are incurred.
In the context of ITR, the financial year refers to the 12-month period in which income is earned, and expenses are incurred. The assessment year immediately follows the financial year in which the income is assessed and taxed. For example, if the financial year is 2021-22, the assessment year would be 2022-23.
The current financial year is April 2022 to March 2023, termed as FY23. The corresponding assessment year is 2023-24.
The fiscal and financial years are the same. They both mean the 12-month period during which financial activities occur and are recorded for accounting purposes.
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