It is important to note that an assessment year is distinct from a fiscal year in several respects. Contrary to popular belief among many taxpayers, assessment years and fiscal years are not interchangeable terms. For the most part, an assessment year is separate from a financial year.
Owing to this misconception, many individuals make mistakes while filing their tax returns, contributing TDS, paying performance feedback tax and paying advance tax. This miscalculation leads to lengthy delays, interest and penalties because of unnecessary processes. To file your ITR correctly, pay your taxes on time and avoid any issue, you need to be well-versed in the basic ideas of income tax. To understand how an assessment year and a fiscal year differ, we first need to understand what an assessment year is.
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The financial year is taken from April to March as the income relies upon the estimation profit made in the period of February and March and the two months give the government an idea of the revenue.
Difference Between Assessment Year (AY) and Financial Year (FY)
Knowing the difference between the financial and assessment years is essential if you are a new taxpayer. The financial year is when you earn your income, make investments and pay taxes. The review, or tax, a year is when you're assessed on your income. Both years start on the first of April and end on the last day of March. To find out which is correct for your situation, use the following few examples:
- The assessment year follows the financial year, reports income and pays taxes. For example, if you work for an offshore company, the financial year (FY) is April 1st to March 31st. The FY 2019-20 will be the same as 2020-21. To determine the previous year in income tax, first select your tax year, correct for you. For instance, FY 2019-20 is the same as AY 2020-21.
- A financial year begins on April 1st and ends on March 31st. In other words, the assessment year is immediately following the financial year. For example, Mr Ravi works as a project manager at a leading software company and earns ₹ 20 Lakhs per month. Mr Albert's salary is ₹50,000 per month in a tax year. Therefore, his assessment date is April 1st, 2019.
Also Read: Everything You Need to Understand About Filing Returns for Previous Years
What Exactly is a Fiscal Year?
The fiscal year (FY) begins on April 1st and ends on March 31st. The fiscal year is the calendar year in which a taxpayer receives taxable income. The following year, the assessment year is when this money is taxed.
Even though the accounting cycle is just a few months long, shareholders are often provided access to a company's annual financial report in April. A person's salary is paid during a fiscal year, a company's or professional's expenditures and profits are incurred and realized and a taxpayer's capital gain or loss from the sale of a capital asset is realised.
It is critical to remember that the financial reporting period will be significantly longer than a calendar year in certain circumstances. To understand profitability, it is necessary to examine how profits and losses are computed differently in various nations.
What Exactly is an Income Tax Assessment Year?
The financial year of income tax ends after the evaluation year, starting the following year. This year defines as the time that begins immediately after the end of the prior fiscal year. An income tax liability is formed when an individual's taxable income is assessed for an AY. Regardless of how it was made during the fiscal year, all of your income is subject to taxes and assessment in the year in which it was derived.
When referring to the previous calendar year, we mean the income tax assessment year 2020-21, which begins on April 1, 2019 and ends on March 31, 2020. Anyone who works for himself or employs others has to keep track of their tax returns with the help of an assessment calendar.
The same income tax year is referred to by both AY and FY. The tax period is the same for both. On the other hand, FY is the format of choice for tax computations. There are times when the use of an AY is suitable. FYs are longer than AYs, which is why they are called AYs.
This implies that you don't need to keep receipts to deduct your costs. It's a good idea to keep track of all your expenditures in a notebook or diary. It's also crucial to have physical evidence to back up your conclusions, as well.
When comparing AY with FY, it is essential to know the meaning of both terms. The financial year starts on April 1 and concludes on March 31 in taxes. The term ‘assessment year’ is used in taxes to refer to the financial year.
- Alternatively, it is alluded to as the prior year’s evaluation.
- In terms of abbreviations, they are identical.
- These concepts are essential to understand whether you work in business or as a professional.
- The calendar year is used for the assessment year and the financial year.
- April 1 and March 31 are the start and finish dates for the assessment period.
- For that particular tax year, the assessee must produce a tax return.
For instance, the current fiscal year begins on April 1 and ends on March 31. Your earnings from April 1 to March 31 of 2022 are included in this year's income.
Also Read: Penalty for Late Filing of Income Tax Return
AY and FY – Differences (Table Format)
Examine the distinctions between the Assessment Year and the Financial Year in the table style provided below to learn more:
Every fiscal year, the general public gains money due to a variety of tax-related actions.
If you earned money during a fiscal year, this is the year in which you must pay taxes on it.
There is no assessment of money gained during the fiscal year since revenue is made throughout that period.
The prior year's income is taxed and assessed in the following year's assessment period.
A taxpayer may be required to pay a portion of the tax on income already earned or generated during the fiscal year.
If a taxpayer receives money during the fiscal year, self-assessment tax may be owed.
Tax planning must be completed either during the fiscal year in which it will be carried out or previous to the fiscal year in which it will be carried out.
If investors invest inside the assessment year, they will not claim a tax deduction.
It makes no difference how much money the taxpayer expected to invest this year.
Any investment made after March 31st will be considered a contribution to the assets for the next fiscal year.
Why is There an AY on an ITR Form?
The income from any given fiscal year is analysed and taxed in the assessment year. Tax return forms include the assessment year (AY). The money is used to delay taxes on earned income that would otherwise be owed for a year after it is created.
An ITR form with AY will not be valid and will be rejected. However, a taxpayer must declare all income on his ITR form to avoid penalties and interest. The AY is a code in the ITR form and indicates a non-taxable income. For example, an individual earning from house property must declare this income on the ITR form. Those with businesses must file an ITR-1 form, and NRIs cannot file an ITR-1 form after the income tax statement for the financial year 2018-19. If they don't own a business, they should use ITR-2.An ITR form is a valuable tool for earning income through a profession or business. An ITR is a must-have for your tax returns, no matter your work. This form will allow you to club all of your income together, from salaries to lottery winnings. It is not a specific profession - it applies to all. You can use the same ITR form if you are a business owner or file your taxes as a professional.
Scenarios such as employment loss, job shift, new investments and so on may occur in the middle or after the fiscal year. Furthermore, until the conclusion of a fiscal year, it is hard to tell how much money was received precisely. The review process may be postponed after the fiscal year has ended. Individuals must choose AY on their income tax forms to avoid penalties and interest.
An assessment year may commence only at the end of the fiscal year. By default, if you choose the incorrect AY on your tax return, you will be forced to submit an ITR for the correct AY. Failure to submit an income tax return can result in a penalty issued by the tax department.Follow Khatabook for the latest updates, news blogs and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary and accounting.