In recent years, due to rapid technological improvisation, tax filing within the estimated timeline has become important for every taxpayer. Before commencing tax filing and income tax returns it is essential to know the accounting terms like financial years, assessment years, Withholding Tax, Adjusted Gross Income (AGI), Tax Evasion, Tax Audit, and more.
Moreover, If you are a taxpayer, there are two terms that must be informed you: the financial year and the assessment year.
In this article, we are talking about the exact meaning of an assessment year and financial year. And what is the difference between a financial year and an assessment year?
What is an Assessment Year?
The assessment year begins just after the previous financial year. This term is usually used in the context of income taxation. During this time taxpayers calculate and report their income, deductions, and all the tax liabilities to the tax authorities.
An assessment year is a term primarily used in the context of income taxation, particularly in countries like India. It refers to the year immediately following the financial year in which an individual or entity earns income. The assessment year is the year in which taxpayers calculate and report their income, deductions, and tax liabilities to the tax authorities.
For example, if the financial year is from 1st April 2023 to March 31st March 2024, then the assessment year would be 2024-2025.
During the assessment year, individuals and entities are required to file their income tax returns for the previous financial year, reporting their total income, deductions claimed, and tax paid. The tax authorities review these returns and calculate the tax liability based on the relevant tax laws and regulations.
What is a Financial Year?
The financial year is a period of 12 months set for the purpose of budgeting and accounting. In India, the financial market takes exactly 12 months starting from April of the current calendar year to March of the next calendar year. Any revenue generated between the particular year is assessed for the current financial year. It is used in accounting to generate financial statements.
1. Top 5 essential things to Know when Filing Tax Returns During Assessment Year
When you file an income tax return for one fiscal year, it is important you know about the basic things of the tax return in the next Assessment year (AY). There are several essential things to keep in mind to ensure accurate and compliant tax reporting. Here are the top five things you should know:
➔ Income Sources and Documentation
Before you start filing tax returns for one financial year, it is essential to gather all the details and relevant documents for the following assessment year. You must be thinking about what type of important things we need to collect as income tax liability for the relevant assessment year.
It includes salary statements, income earned, dividends, rental income, and any other sources of income. Ensure that you have Form 16 (provided by your employer) and Form 16A (for TDS on non-salary income) if applicable. Properly organizing and documenting your income sources will help you accurately report your earnings.
➔ Income Tax Return Deductions and Exemptions
If you are new as an income taxpayer or you have been filing income tax for years, you should be familiar with the deductions and exemptions available under the tax laws. These can significantly reduce your taxable income and, consequently, your tax liability.
Common deductions include those for investments in provident funds, life insurance premiums, health insurance premiums, and donations to charitable organizations. Ensure you have the necessary documents to claim these deductions.
➔ Filing Deadline and Extension
When filing income tax returns, it is also essential to be aware of the deadline for filing your tax return during the assessment year.
The income tax department has specific terms and conditions in case of income tax filing in one financial year (FY) Failing to file your tax on time can lead to penalties and interest charges. In some cases, you might be eligible for an extension, but it’s essential to know the specific conditions and procedures for obtaining one.
➔ Online Filing and Digital Signatures
Many countries provide the option to file tax returns online. As per the Income Tax Act, tax filing may appear online or offline.
In the case of the online filling process some things, you need to submit correctly. Those are submitting the income tax forms properly attaching digital signatures or electronic verification codes, and the previous year’s income, previous taxpayer file, etc. Ensure that you have the necessary login credentials for the tax portal and that your digital signature (if required) is valid.
➔ Review and Accuracy
If you are filing taxes for one financial year. It is essential to review your tax return before submitting it. Ensure that all the information you’ve entered is accurate, including monthly and annual income, deductions, and personal information. Small errors or discrepancies can lead to delays in processing or potential tax notices.
➔ Professional Assistance
If you’re unfamiliar with the tax laws or have complex financial situations, consider seeking assistance from a tax professional or accountant. They can help ensure that you’re taking advantage of all available deductions and exemptions while adhering to the tax regulations.
Remember that tax laws and regulations can vary by country and region, so it’s essential to stay informed about the specific rules that apply to your situation. Being organized, understanding the process, and accurately reporting your financial information is key to a successful and stress-free tax filing experience during the assessment year.
2. What is the difference between the Assessment year (AY)and the Financial Year (FY)?
Theoretically, the Assessment year and the financial year are almost the same, though there are some differences as both the years refer to different periods and define various purposes like income taxation, particularly in countries like India. Here’s the difference between the two:
|–||Financial Year (FY)||Assessment year (AY)|
|Purposes||The financial year, also known as the fiscal year, is the period during which an individual, business, or entity calculates its financial activities and earnings.||The assessment year is the consecutive year of the financial year.|
|Time||In India, the financial year runs from April 1st to March 31st of the following year.||In India, the assessment year will be counted as the time just after the following fiscal year where all necessary assessment is done for the next financial year.|
|Function||It is the year in which income is earned, expenses are incurred, and financial transactions take place.||It is the year when individuals and entities assess and report their income, deductions, and tax liabilities to the tax authorities.|
|Taxpayers Outlook||Taxpayers prepare financial statements and accounting records based on the financial year.||Taxpayers file their income tax returns for the previous financial year during the assessment year.|
In India, the assessment year is designated by the year in which the tax return is filed. For example, if the financial year is from April 1, 2023, to March 31, 2024, then the assessment year would be 2024-2025.
3. Why does an ITR form have AY?
An Income Tax Return (ITR) form includes the Assessment Year (AY) primarily to establish a clear link between the income earned during the Financial Year (FY) and the period in which that income is assessed for taxation purposes. The AY serves as a reference point for tax authorities to ensure that accurate tax calculations are applied based on the income and financial transactions that occurred in the preceding Financial Year.
In essence, the AY is a way to designate the year in which taxpayers report their income, deductions, and other financial details related to the FY. It aids in organizing tax-related information, simplifying the tax filing process, and enabling tax authorities to systematically assess and collect taxes according to the appropriate rates, rules, and regulations relevant to that particular financial period.
4. Example of Financial year and Assessment year
➔ Period 2023: April 1, 2022 – March 31, 2023
The financial year starts from April 2022 – March 2023
The assessment Year starts from April 2023 – March 2024
➔ Period 2022: April 1, 2021 – March 31, 2022
The financial year starts from April 2021 – March 2022
Assessment Year starts from April 2022 – March 2023
➔ Period: April 1, 2020 – March 31, 2021
The financial year starts from April 2020 – March 2021
The assessment year starts from April 2021 – March 2022