Difference Between Assessment Year (AY) and Financial Year (FY)

A financial year is the period during which you earn your income. The assessment year is the subsequent year for the assessment of your earned income during the FY and filing of taxes. Understanding the difference between the two helps you file taxes correctly. 

Simply put, you report income for the FY. On the other hand, assessments and taxes apply in the AY.

It is a 12-month period for accounting and tax purposes. In India, it starts on 1st April and ends on 31st March. For example, FY 2023-24 runs from 1st April 2023 to 31st March 2024. You use this period to track income, expenses, and taxes.

AY is the 12-month period that follows the financial year. You pay taxes and file returns for the income earned in the previous year during this time. For example, you will pay tax on your income in FY 2023-24 during AY 2024-25.

Understanding the corresponding AY for each FY is essential for accurate tax filing and compliance. Below is a table showing the assessment year and financial year for recent years to help you track and manage your tax obligations:

Understanding the distinctions between the two periods is essential for effective tax planning and compliance. Below is a table summarising their key differences and roles:

Finance Minister Nirmala Sitharaman has announced two key changes for individuals opting for the new tax regime:

Enhanced Deductions

• The standard deduction for salaried employees is proposed to increase from ₹50,000 to ₹75,000.

• For pensioners, the deduction on family pension is proposed to rise from ₹15,000 to ₹25,000.

Revised Tax Rate Structure

The Finance Minister also introduced a revised tax structure under the new tax regime: 

Understanding the difference between the assessment year and the financial year is crucial for effective tax management. Confusion between the FY and AY can lead to significant errors in tax filing. 

For instance, mistakenly reporting income from the AY instead of the correct FY can result in underreporting or overreporting income. This can trigger penalties, interest on unpaid taxes, or delays in processing returns.

Go through the following examples to understand how these two periods function in tax forms:

• Specify the Assessment Year when selecting the ITR form (e.g., AY 2024-25 for income from FY 2023-24)

• Report income earned during the Financial Year in the ITR form (e.g., FY 2023-24)

• Claim deductions applicable to the Financial Year in the ITR (e.g., contributions from FY 2023-24)

• Calculate tax liability based on income from the Financial Year, assessed in the Assessment Year

• Follow filing deadlines based on the Assessment Year (e.g., 31st July 2024 for AY 2024-25)