The terms financial year and assessment year are often used when we talk about finance. Most of us may get confused between both these terms as they may seem similar.
While the financial year is the year when you earn money, the assessment year is the year when you calculate taxes and file tax returns on that money. So, if you file taxes, it is important you are aware of both the terms, their significance and more.
In this blog, we will understand what is a financial year, what is an assessment year, the difference between AY and FY, etc.
What is a Financial Year (FY)?
A financial year (FY) is a 12-month period that starts on April 1st and ends on March 31st of the next year. This is the time when you work, earn money, invest and spend. So, if you earned money from April 1, 2024, to March 31, 2025, then this means your financial year is FY 2024-25.
A financial year is important for the government as well as individuals as they use it for tax calculations, budget planning and financial reports. Hence, businesses also maintain records for this period.
Now, let’s move on to the assessment year.
What is an Assessment Year (AY)?
Now that you have earned your money in the financial year, the next step is to file your taxes. This happens in the assessment year (AY), which is the year after the FY. So, if your financial year is FY 2024-25, then the assessment year will be AY 2025-26.
The assessment year is significant for tax filing, tax assessment and refund process, in case you have paid extra tax.
Major Differences Between Financial Year and Assessment Year
For detailed comparison and understanding, below is the table showing the difference between the assessment year and the financial year:
| Feature | Financial Year | Assessment Year |
|---|---|---|
| Meaning | Year in which you earn income | Year in which you file taxes on that income |
| Duration | April 1 to March 31 | April 1 to March 31 (Next Year) |
| Purpose | Earn, spend, invest | File tax returns, claim deductions |
| Example | FY 2024-25 (April 1, 2024 – March 31, 2025) | AY 2025-26 (April 1, 2025 – March 31, 2026) |
So, the crux is – you earn in the financial year and file taxes in the assessment year.
Also Read : New Income Tax Slabs 2025Why are FY and AY Separate?
Now, the question arises – why do we need two different years to earn and file taxes? Why can’t we file taxes in the same year? Well, here are some of the reasons why FY and AY are separate:
- After the FY ends on March 31st, taxpayers need time to calculate their total income and deductions. That’s why AY is provided to do the same.
- It is also related to taxpayer convenience, as it may get confusing and stressful if you file taxes while still earning.
- The government also needs time. The tax department needs a period to assess and verify income details.
- It makes the tax filing process organised.
Importance of Financial Year and Assessment Year for Taxpayers
Every taxpayer in India must understand the difference between the financial year and the assessment year because:
- It affects tax planning. Moreover, knowing your FY and AY would help you file taxes on time.
- Ensures smooth tax filing.
- It helps avoid penalties.
Conclusion
So, this was the difference between the financial year and the assessment year. You earn in the FY and file taxes in the AY.
Make sure you keep track of them so it becomes easy for you to file taxes and manage your finances smoothly.
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