As per income tax laws, all taxpayers must file their Income Tax Return (ITR) for the previous year, within the prescribed due dates, during the assessment year. The due date for filing tax returns for salaried taxpayers & non-audit businesspersons and professionals is usually July 31. Sometimes this date may be extended by the Finance Ministry.
Since the terms 'financial year', 'previous year' and 'assessment year' are often used in income tax laws, it’s helpful for all taxpayers to know their basic meaning. Read on to know the meaning and importance of these terms.
What is Financial Year?
A financial year (FY) is a period of 12 months starting on April 1 and ending on March 31 of the following calendar year. This is the time period when income is earned, and this income will be subject to tax in the following year. During the FY, an individual may earn his/her salary, incur expenses and profits on a business, earn dividend income from mutual funds or incur capital gains on redeemed units, and earn rental income on a property. All the financial transactions you do during this period must be considered for filing ITR.
What is Assessment Year in income tax?
The assessment year (AY) is a period of 12 months that immediately succeeds the financial year. This is the period when the earned income is assessed and taxed accordingly. For example, for the financial year starting April 1, 2021 and ending on March 31, 2022, the corresponding assessment year will be 2022-23.
What is the difference between Financial Year and Assessment Year?
From the perspective of income tax laws, the financial year always precedes the corresponding assessment year. For example, 2021-22 is the financial year with the corresponding assessment year 2022-23.
Why is the Assessment Year important?
For making any filings with the income tax department, including filing Income Tax Returns (ITRs), paying advance tax, self-assessment tax, etc., the taxpayers must quote the relevant assessment year. All the tax records are saved concerning the assessment year only, as the primary document of our tax records, i.e., ITRs are filed for the relevant assessment year only.
Estimating one’s income for the year and filing the taxes in the same year may be challenging. Hence income tax laws clearly state that the returns must be filed during the following year, i.e. the assessment year, instead.
However, taxpayers are also liable to pay advance tax on their income during the financial year itself if the aggregate tax liability after accounting for TDS (Taxes Deducted at Source), TCS (Taxes Collected at Source) exceeds Rs. 10,000. The taxpayer must estimate such tax liability during the financial year itself and make advance tax payments.
In case of default in making pro-rated advance tax payments as per the specified payment schedule, taxpayers would be required to pay interest on such shortfall of advance tax payments. All the tax payments paid during the financial year are called advance tax, while the tax payments made during the assessment year, or any subsequent years are called self- assessment tax.
Taxpayers must pay due attention while filing their tax documents and making tax payments to mention the relevant assessment year. This saves the taxpayers from future hassles, as the taxes paid for any earlier assessment year cannot be adjusted against any other assessment year. For such tax payments, the taxpayer should claim a refund from income tax authorities for the excess tax paid and make tax payments in compliance with tax due dates.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. Please contact your tax advisor for professional tax advice.
