Financial Year is different from the Assessment Year. Most of the assessees think that the Financial Year and Assessment Year are one of the same things, but they both are not the same.
Meaning of Financial Year and Assessment Year
Financial Year is the year in which the assessee earns the total income. On the other hand, the Assessment Year is the year which comes after the Financial Year.
Both terms in Hindi
Financial Year in Hindi is known as वित्तीय वर्ष and Assessment Year in Hindi is known as निर्धारण वर्ष.
Also Read: 7 Reasons why you should file your Income Tax Return?
Income Tax Perspective
As per the Income Tax Act, Financial Year is the year in which the income is earned and is known as Previous Year for the purpose of taxation and the Assessment Year is the year in which the income is assessed and taxed.
The purpose behind distinction between Financial and Assessment Year under the Income Tax Act is that the Income cannot be taxed before it is earned. The tax can be calculated on income only when it has been earned. The income earned during the Financial Year is assed and taxed in the Assessment Year. Therefore, the assessees have also to select their Assessment Year before filing of their Income Tax Returns.
Also Read: Best ways to save your taxes in 2022
Tax planning
The assessee cannot claim any deductions or save taxes through investments made in the same financial year. The investments made in the FY can be used in saving taxes only in its AY.
For instance, Ram invests in LIC policy in the FY 2021-2022. He can claim deduction under Section 80C only in the AY 2022-2023 i.e., the year in which his income will be assessed and taxed.
Also Read: Ways to save tax other than Section 80C
Examples
| Financial Year | Assessment Year | Financial Year |
|---|---|---|
| 2020-2021 | 2021-2022 | 2020-2021 |
| 2021-2022 | 2022-2023 | 2021-2022 |
| 2022-2023 | 2023-2024 | 2022-2023 |
| 2023-2024 | 2024-2025 | 2023-2024 |
| 2024-2025 | 2025-2026 | 2024-2025 |
Conclusion
– Financial Year 2021-2022 income means income earned from 1st April, 2021 to 31st March, 2022.
– Income of Financial Year 2021-2022 will be assessed and taxed in Assessment Year 2022-2023.
– Both FY & AY, begin on 1st April & end on 31st March.
– Therefore, FY 2021-2022 & AY 2022-2023 are the same things.
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