What is the Financial Year and Its Significance?

Explore the concepts of the financial year, the difference between financial year and assessment year and their significance in the income tax returns.

The books of accounts are maintained for a period of 1 year. The start date of this period however differs from company to company. While reading the financial statements of a company, you may have come across the terms financial year and assessment year.  In this article, learn what is a financial year, assessment year and how they are different from each other.

What Is the Financial Year?

A Financial Year (FY), also known as the fiscal year or accounting year, is a fixed period of 12 months during which businesses, organisations, and governments manage their financial activities, i.e., track their financial performance and report their results. The financial year is crucial for financial management, planning, and compliance, as it allows entities to monitor their financial health, create budgets, set targets, prepare financial statements, and fulfil tax obligations within the specified timeframe.

What Is an Assessment Year?

The Assessment Year (AY) is the period during which tax authorities evaluate and assess an individual or organisation’s income and tax liability based on the information provided in their income tax return for the corresponding financial year. It serves as a critical phase in the taxation process, allowing tax authorities to review the accuracy and completeness of the taxpayer’s financial information, calculate the tax due, and determine if any adjustments or refunds are necessary.

Read more about Required Document for ITR Filing

The assessment year plays a vital role in ensuring tax compliance and fairness, providing a mechanism for taxpayers to rectify errors, claim deductions, and address any discrepancies related to their tax liability.

The Indian Financial Year and Assessment Year

The financial year in India is from 1st April to 31st March. If the current financial year is FY 2023 – 2024, it means the statement talks about the finances from 1st April 2023 to 31st March 2024. 

In the case of the Assessment Year, though it is from 1st April to 31st March, the year considered will be different from the financial year. For example, the income earned in FY 2022 – 2023 will be taxable in AY 2023 – 2024 (1st April 2023 to 31st March 2024). 

Here’s a table to understand FY and AY better: 

Year start on Year-end on Financial Year (FY) Assessment Year (AY)
1st April 2020 31st March 2021 2020 – 2021 2021 – 2022
1st April 2021 31st March 2022 2021 – 2022 2022 – 2023
1st April 2022 31st March 2023 2022 – 2023 2023 – 2024
1st April 2023 31st March 2024 2023 – 2024 2024 – 2025

Difference Between FY and AY

Factors Financial Year (FY) Assessment Year (AY)
Definition  FY is the time period used to calculate the income and expenses of an organisation for taxation purposes. It is a timeframe for recording financial transactions, creating budgets, making strategic decisions, and generating financial statements. AY is the period where the taxes are assessed and filed for tax returns. It refers to the year one must pay taxes on the income earned during the FY. 
Time frame  The financial year in India starts on the 1st April and ends on the 31st March of the next calendar year. The assessment year is the year immediately succeeding the financial year for which tax assessments are conducted. In India, the AY starts on 1st April and ends on 31st March of the next calendar year.

Why Does ITR Form Have an Assessment Year?

The assessment year in the Income Tax Return (ITR) form serves multiple purposes. It helps in accurate tax calculation by requiring taxpayers to report their income, deductions, and tax payments for the preceding financial year. Additionally, the assessment year ensures timely compliance as it sets a reference period for filing ITR within the designated deadline. It also allows for the comparability of tax-related data, enabling analysis of trends and identification of discrepancies over time.

Furthermore, the assessment year plays a role in determining the statute of limitations for tax assessments and legal proceedings. It provides a timeframe within which the tax authorities can review and make adjustments to filed tax returns or initiate audits and investigations if necessary.

Lastly, the assessment year is vital for processing income tax refunds and making adjustments in cases of excess tax payments. Taxpayers can claim refunds for any overpayments made during the financial year, ensuring fairness and providing a mechanism for rectifying any financial discrepancies.


Can the financial year and assessment year differ across countries?

Yes, the financial year and assessment year can vary across countries. Different jurisdictions may have their own defined start and end dates for the financial year and assessment year, depending on their respective tax laws and administrative practices.

Why does the financial year start on 1st April, not on 1st January in India?

In the United Kingdom (UK) the financial year starts on 1st April. And as the British ruled India prior to the independence, the same concept was applied in India which was not changed after the independence and followed till date.

How does the assessment year affect tax refunds?

The assessment year plays a significant role in processing income tax refunds. If a taxpayer has made excess tax payments during the financial year, they can claim a refund in the assessment year. The tax authorities review the taxpayer’s filed return, verify the excess payments, and process the refund accordingly.

What happens if I miss the deadline for filing my income tax return in the assessment year?

Failing to file your income tax return within the specified deadline in the assessment year may result in penalties or consequences imposed by the tax authorities. These penalties can include monetary fines or additional interest charges on outstanding tax liabilities. It is crucial to adhere to the filing deadlines and fulfil your tax obligations to avoid any penalties or legal issues.

What are the documents we need to maintain for the financial year and assessment year?

It is important to maintain proper documentation and records related to financial transactions, income, deductions, and tax payments for the financial year. These records serve as supporting evidence for the information reported in the income tax return and may be required for future reference or tax audits. Common documents to keep include bank statements, invoices, receipts, salary slips, investment statements, and relevant financial statements.