Financial Year and Assessment Year - Difference Between FY and AY

Introduction

Understanding the difference between Financial Year (FY) and Assessment Year (AY) is essential for proper tax planning and filing. Many people confuse these two terms, but they are different. The Financial Year (FY) is the period in which you earn income, while the Assessment Year (AY) is the period in which your income is assessed and taxed by the Income Tax Department. Correctly identifying FY and AY ensures the timely and accurate filing of your Income Tax Return (ITR). In this article, we will explain the concepts of FY and AY, give examples, highlight the Indian financial year structure, and provide updates from Budget 2025.

What is a Financial Year?

A Financial Year (FY), also known as Fiscal Year, is the period in which an individual, company, or business earns income. In India, the Financial Year runs from 1st April of a year to 31st March of the next year.

Example:

• If you earn income from 1st April 2025 to 31st March 2026, this period is considered the Financial Year 2025-26 (FY 2025-26).

• Your salary, business profits, or other income earned during this period will be counted for tax purposes in the Assessment Year 2026-27.

The Financial Year is important because it determines the income that needs to be reported for taxation. All calculations for tax, deductions, and exemptions are based on the income earned during the FY.

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What is an Assessment Year?

An Assessment Year (AY) is the year following the Financial Year, in which the income earned during the FY is assessed and taxed by the government. Essentially, the AY is the period when you file your Income Tax Return (ITR) for the previous Financial Year.

Example:

• For FY 2025-26 (income earned from 1st April 2025 to 31st March 2026), the corresponding Assessment Year is AY 2026-27.

• This is the year in which your income from FY 2025-26 is evaluated, taxes are calculated, and your ITR is filed.

The Assessment Year ensures a structured timeline for the tax authorities to assess the income and collect taxes. It also helps taxpayers understand when to pay taxes and file returns for the income earned in the Financial Year.

The Indian Financial Year

In India, the Financial Year is standardized for all taxpayers, running from 1st April to 31st March of the next year.

• It applies to individuals, businesses, and companies.

• Tax calculations, deductions, and investments are measured within this period.

• Every Financial Year has a corresponding Assessment Year in which the taxes for that FY are filed and processed.

Assessment and Financial Year in India for the Recent Years

Here is a simple illustration of recent FYs and corresponding AYs:

Financial Year (FY)

Assessment Year (AY)

2023-24

2024-25

2024-25

2025-26

2025-26

2026-27

2026-27

2027-28

For example:

• Income earned between 1st April 2024 to 31st March 2025 is in FY 2024-25, and taxes for this income will be assessed in AY 2025-26.

Understanding this mapping helps taxpayers file ITR on time and avoid penalties.

Difference Between AY and FY

Feature

Financial Year (FY)

Assessment Year (AY)

Meaning

The year in which the income is earned

The year in which income is assessed and taxed

Time Period

1st April to 31st March

1st April to 31st March of the following year

Purpose

Tracks income earned

Tracks taxes due on income earned during FY

Example

FY 2025-26: 1st April 2025 to 31st March 2026

AY 2026-27: Income from FY 2025-26 assessed and taxed

Used for

Calculating income, deductions, and investments

Filing ITR and paying taxes

Why does the ITR form have an assessment year?

The Assessment Year is mentioned in the ITR forms to indicate the period during which your income from the Financial Year will be assessed and taxed. This helps in:

1. Proper Tracking: Income earned in a particular FY is tracked in the corresponding AY.

2. Timely Filing: Taxpayers know the due date for filing returns for a specific FY.

3. Avoiding Confusion: Without the AY, it would be difficult to distinguish which year’s income is being taxed.

4. Compliance: It ensures structured compliance and helps tax authorities maintain records efficiently.

For example, if you are filing ITR in July 2025, you will file it for AY 2025-26, which corresponds to FY 2024-25.

Things to Remember While Filing ITR During the AY

• Always check the correct AY on your ITR form.

• Report income earned in the previous Financial Year correctly.

• Claim deductions and exemptions applicable for that FY.

• Ensure that all TDS and tax credits are correctly entered.

• Filing ITR for the wrong AY can lead to delays, notices, and penalties.

• Keep proof of investments and receipts handy for verification.

FY and AY in Hindi

• Financial Year (आर्थिक वर्ष): वह वर्ष जिसमें आप आय अर्जित करते हैं। उदाहरण: 1 अप्रैल 2025 से 31 मार्च 2026 = FY 2025-26

• Assessment Year (आकलन वर्ष): वह वर्ष जिसमें आपकी आय का कर मूल्यांकन और रिटर्न फाइलिंग होती है। उदाहरण: आय अर्जित FY 2025-26 के लिए AY 2026-27

Budget Update 2025

The Budget 2025 has introduced several changes regarding Income Tax slabs, exemptions, and deductions:

• Simplified tax filing for individuals and senior citizens.

• New slabs under the new tax regime to reduce the burden on middle-income taxpayers.

• Updated deduction limits for sections like 80C and 80CCD.

• Encouragement for taxpayers to choose the appropriate tax regime based on their financial profile.

These updates impact both FY and AY calculations, ensuring taxpayers file returns correctly for the relevant year.

Conclusion

Understanding the difference between Financial Year (FY) and Assessment Year (AY) is crucial for accurate tax planning. FY is the period when you earn income, while AY is the period in which your income is assessed and taxed. Correctly identifying FY and AY ensures timely ITR filing, deduction claims, and compliance with income tax laws. Staying updated with Budget 2025 changes and understanding the mapping of FY to AY will help taxpayers avoid penalties and maximize tax benefits.