Income Tax 101: What is Financial Year and Assessment Year, how does it impact your taxes

India's Financial Year (FY) runs from April 1st to March 31st, representing the period of income generation. The Assessment Year (AY) is the subsequent year, during which the income earned in the FY is assessed and tax returns are filed.

When it comes to filing income tax in India, two terms often create confusion: Financial Year (FY) and Assessment Year (AY). While they may sound similar, they serve different purposes in the tax system. Here's an easy breakdown.

What is a Financial Year (FY)?

A Financial Year is the 12-month period during which you earn income. In India, it starts on April 1st and ends on March 31st of the following year.

Example:

If you earned money between April 1, 2024, and March 31, 2025, the financial year is called FY 2024-25.

You work, earn, and make investments during this time.

What is an Assessment Year (AY)?

The Assessment Year is the year immediately after the financial year, in which the Income Tax Department assesses (reviews) your income and tax returns.

Example:

For the income earned in FY 2024-25, the corresponding Assessment Year is AY 2025-26.

That's when you file your tax return, usually between April and July (or later if extended).

How does this help you?

1. Systematic tax filing

These two terms clearly define when you earn income (FY) and when it should be taxed or assessed (AY). This keeps records organized and helps you plan your taxes better.

2. Claim deductions and refunds:

During the FY, you make investments (e.g., in LIC, PPF, ELSS) that are eligible for tax deductions. In the AY, you claim those deductions while filing returns.

3. Track compliance:

Knowing which year your income belongs to and which year it's assessed in helps avoid errors, notices, or penalties.

4. Ease in planning:

Financial planning becomes easier when you know what's taxable and when. You can plan salary restructuring, investments, or selling assets accordingly.