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HR GLOSSARY

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Financial Year

What is Financial Year? A Simple Guide That Actually Makes Sense (2025)

Still confused about what a financial year means? You’re not alone. A financial year spans 12 months as an accounting period that companies use to prepare annual financial statements and handle tax obligations. The Indian financial year begins on April 1st and ends on March 31st of the next calendar year.

Most people follow the January-to-December calendar in their daily lives. However, financial years operate on a different schedule that serves accounting and tax purposes. You need to understand India’s financial year system to file taxes, plan investments and manage business finances effectively. The timeline stays the same each year, though the actual years move forward (for example, April 1, 2024, to March 31, 2025).

Let’s break down everything about financial years in simple terms. We’ll explore the difference between financial years and assessment years. This knowledge matters significantly to your tax filing process and helps you avoid confusion that could impact your financial planning.

What is a Financial Year?

A financial year means much more than calendar dates. This structured timeframe shapes economic planning and tax administration. Let’s dive into what makes it so vital in our financial lives.

Definition and purpose

A financial year (FY) spans 12 months. Companies and governments use it to track income, expenses, and overall financial performance. This specialized timeframe differs from a regular calendar year and helps create a systematic approach to financial management.

The financial year exists to create a standardized period for:

  • Computing income statements and preparing balance sheets
  • Measuring profits and losses over a consistent timeframe
  • Establishing a structured system for tax collection
  • Facilitating year-to-year financial comparisons

The financial year lays the groundwork for tax planning. Any income earned during this period becomes the basis for calculating tax liabilities. Companies use this timeframe to review their financial health, distribute resources, and plan future investments.

Financial year start and end in India

India’s financial year follows a specific pattern. It starts on April 1st and ends on March 31st of the next calendar year. The current financial year (2024-25) began on April 1, 2024, and will wrap up on March 31, 2025.

India’s financial year breaks down into four quarters:

  • First quarter (Q1): April 1 to June 30
  • Second quarter (Q2): July 1 to September 30
  • Third quarter (Q3): October 1 to December 31
  • Fourth quarter (Q4): January 1 to March 31

These quarterly divisions help track financial performance and adjust strategies throughout the year. Some companies choose different financial year schedules. Nestle India runs on a January-December financial year, while Gillette India ends its financial year on June 30.

Why it matters for individuals and businesses

The financial year plays a vital role for everyone in the economic ecosystem. The government uses this period to estimate national income and spending, set economic goals, and prepare the annual budget. This timeline helps implement and monitor fiscal policies.

Businesses rely on the financial year to:

  • Plan strategies and allocate resources
  • Prepare annual financial statements
  • Plan performance and review against targets
  • Make smart investment and expansion decisions

Taxpayers need to understand the financial year because it defines when income counts and financial transactions matter. Money received between April 1 and March 31 counts as income for that specific financial year, which determines tax obligations.

The financial year also shapes employee compensation. Many organizations decide raises, bonuses, and benefits based on their performance during this period. This creates a direct connection between company success and personal financial growth.

In a nutshell, the financial year brings order and consistency to financial management across the economy. Understanding this concept helps you handle taxes, run a business, or manage personal finances more smoothly.

What is an Assessment Year?

Let’s dive into the assessment year after understanding the financial year concept. The assessment year is a significant part of India’s taxation system that shapes how we manage our tax obligations.

How it follows the financial year

The assessment year (AY) runs for 12 months right after a financial year. The period starts on April 1 and ends on March 31 of the next year, just like the financial year. The main difference lies in what each period does – you earn your income during the financial year, and the tax authorities assess that income during the assessment year.

This setup creates an organized tax system. The income you earn in one financial year goes through assessment the next year. You get enough time to gather your financial records, work out your tax, and complete your paperwork after the financial year ends.

The financial and assessment years follow this pattern:

When income is earnedWhen income is assessed
Financial Year (FY)Assessment Year (AY)
April 1 – March 31April 1 – March 31 of the next year

Role in tax filing

The assessment year gives you time for three vital tax activities:

  1. Tax calculation: Your previous financial year’s income gets assessed against tax rates and deductions during this time.
  2. Tax payment: You need to clear any pending tax dues in this period.
  3. ITR filing: You submit your Income Tax Return (ITR) to document your previous year’s finances.

Most people must file their ITR by July 31st of the assessment year. This deadline comes about four months into the assessment year, which gives you enough time to organize your previous year’s financial details.

Note that tax forms usually mention the assessment year instead of the financial year in their titles and documents. This knowledge helps you avoid confusion while filling out forms.

Example: FY 2024-25 and AY 2025-26

Here’s a clear example of how this works:

The financial year 2024-25 runs from April 1, 2024, to March 31, 2025. Any money you earn during this time – from your salary, investments, business profits, or other sources – belongs to FY 2024-25.

AY 2025-26 would be the assessment year for this income, running from April 1, 2025, to March 31, 2026. During this time, you:

  • Calculate your total taxable income from FY 2024-25
  • Apply deductions and exemptions you qualify for
  • Figure out your final tax amount
  • File your income tax return

A salary payment you receive in December 2024 falls under FY 2024-25. You’ll report this income in your tax return during AY 2025-26.

This system works well because income assessment can only happen after you complete the earning period. The assessment year gives both taxpayers and tax authorities time to handle the previous year’s finances in an organized way.

Key Differences Between Financial Year and Assessment Year

The difference between financial year and assessment year serves as the life-blood of India’s taxation system. A clear grasp of these differences will give a proper tax plan and help comply with tax regulations.

At the time income is earned vs. when it is taxed

Timing and purpose create the most basic difference. The financial year shows the actual period of earning income, while the assessment year represents the time tax authorities review that income.

This relationship exists because:

  • Income tax calculations happen after earning the money
  • Complete financial year data must exist before assessment begins
  • The final income figures become available only after the financial year ends

The money you receive between April 1, 2024, and March 31, 2025 (FY 2024-25) goes through tax review between April 1, 2025, and March 31, 2026 (AY 2025-26). This year-long gap lets taxpayers and authorities gather financial records and calculate exact tax amounts.

Use in tax forms and documentation

Tax return forms display the assessment year rather than the financial year. This happens because:

  • People file tax returns during assessment year for previous financial year’s income
  • Assessment year labels help authorities sort and process returns efficiently
  • The system prevents wrong year filing mistakes

Every ITR form shows the assessment year at the top right corner. The online system asks you to pick the right assessment year—not the financial year of your income.

Common confusion and how to avoid it

People often get confused about FY-AY relationships because:

  1. Most taxpayers think they should use financial year during tax filing
  2. Tracking the one-year gap between earning and assessment becomes tricky
  3. Financial changes in the middle of the year (job switches, investments, etc.) make it hard to identify the applicable year

Here’s how to handle this confusion:

Keep accurate records: Sort all financial papers by financial year instead of calendar year. This should cover income statements, investment proofs, and expense receipts.

Use a simple formula: The formula AY = FY + 1 works best. To cite an instance, Financial Year 2024-25 matches with Assessment Year 2025-26.

Stay informed about tax laws: Tax rules change each year. Latest amendment reviews help you follow rules and get new deductions.

Select the correct ITR form: Various ITR forms suit different income sources and taxpayer types. The right form choice matters for accurate filing.

A clear understanding of each year’s purpose helps you direct the tax filing process with confidence and avoid mistakes that could lead to penalties.

Recent Financial Years and Their Assessment Years

Tax planning requires a clear understanding of financial years and their matching assessment years. Each assessment year follows its financial year in a predictable way that taxpayers need to know.

Table of recent FY and AY pairs

Assessment years follow financial years in a consistent pattern. Each assessment year starts one year after its matching financial year. Here’s a detailed look at recent and upcoming pairs:

PeriodFinancial Year (FY)Assessment Year (AY)
April 1, 2019 – March 31, 20202019-202020-21
April 1, 2020 – March 31, 20212020-212021-22
April 1, 2021 – March 31, 20222021-222022-23
April 1, 2022 – March 31, 20232022-232023-24
April 1, 2023 – March 31, 20242023-242024-25
April 1, 2024 – March 31, 20252024-252025-26
April 1, 2025 – March 31, 20262025-262026-27

This table shows that assessment years always run one year ahead of their matching financial years.

How to identify the current financial year

You can easily figure out the current financial year by understanding a simple pattern. FY 2024-25 serves as our current financial year, running from April 1, 2024, to March 31, 2025.

Finding your financial year takes three simple steps:

  1. Check today’s date
  2. Find which April 1 to March 31 period includes your date
  3. Use these years to create your financial year designation

Indian financial years follow the format “FY YYYY-YY”. The first four digits show the starting year, while the last two digits represent the ending year.

Why this matters for ITR filing

Selecting the right assessment year instead of the financial year plays a vital role in tax filing. Your Income Tax Return (ITR) must match the correct assessment year.

To cite an instance, income earned in FY 2024-25 needs ITR filing under AY 2025-26. Wrong assessment year selection can trigger processing errors and penalties from tax authorities.

Tax deductions and exemptions claimed in an assessment year link to your previous financial year’s activities. This system gives a full picture of tax administration.

Why ITR Forms Use Assessment Year

Tax forms display assessment years rather than financial years, and with good reason too. This practice stems from tax law principles. The difference helps taxpayers file their returns accurately and steer clear of mistakes.

Timing of income realization and tax calculation

The realization principle forms the foundation of income tax. The Supreme Court defines it as requiring “undeniable accessions of wealth, clearly realized, and over which the taxpayer has complete dominion”. This principle states that income becomes taxable only after it’s definitively earned.

Four key events trigger income realization:

  • Property exchanges
  • Relief from legal obligations
  • Ownership transfers
  • Completion of profit transactions

The assessment year system naturally aligns with this principle. It provides enough time to calculate exact income amounts and determine appropriate tax liability after the financial year ends.

Scenarios that affect income during the year

Several situations can affect your income throughout a financial year:

  • Job changes or losses
  • New investments
  • Business fluctuations
  • Advance payments received

To cite an instance, see this example: INR 168,760 as advance payment received for services becomes taxable revenue only after service completion. The payment receipt date doesn’t matter. Such financial changes during the year make exact tax calculations impossible until the financial year concludes.

How to choose the correct AY when filing

The proper assessment year selection needs these simple steps:

  1. Identify your income earning period (which financial year)
  2. Add one year to get the corresponding assessment year
  3. Look for this assessment year in ITR form dropdowns

A taxpayer filing before July 31, 2025, for income earned between April 1, 2024, and March 31, 2025 (FY 2024-25), must select AY 2025-26 on the ITR form.

The correct ITR form selection matters equally. Your income sources—salary, capital gains, business income—determine which ITR forms apply. The form selection process starts with the assessment year since it establishes the relevant filing period.

Conclusion

Tax planning and financial management become much simpler when you understand how financial years differ from assessment years. The financial year runs from April 1 to March 31 and represents your income earning period. The following assessment year is when tax authorities review this income.

Your income for the current financial year 2024-25 will be assessed in 2025-26. This follows a simple pattern – the assessment year is always one year ahead of the financial year. Choosing the right assessment year is crucial for your ITR filing to avoid processing errors and penalties.

Businesses use quarterly divisions in financial years to track their performance. The assessment year gives both taxpayers and authorities time to prepare financial records after the income period ends. Tax documents always refer to assessment years instead of financial years – a small detail that makes a big impact.

Taxpayers often struggle to identify which year applies to their filings. You can avoid common mistakes by keeping your records organized by financial year rather than calendar year. The tax regulations change frequently, so staying updated helps you claim all applicable deductions while meeting compliance requirements.

Financial and assessment years might look like mere administrative details. All the same, understanding them properly creates strong foundations for tax planning and financial management. This knowledge will help you direct your way through tax filing seasons confidently and accurately, without the complications that year-related confusion brings.

Key Takeaways

Understanding financial years and assessment years is crucial for proper tax planning and compliance in India’s taxation system.

• Financial Year runs April 1 to March 31 – This is when you earn income, not when you pay taxes on it

• Assessment Year = Financial Year + 1 – Income earned in FY 2024-25 gets taxed in AY 2025-26

• ITR forms always use Assessment Year – Select AY 2025-26 when filing taxes for FY 2024-25 income

• File ITR by July 31st of Assessment Year – This gives you 4 months after financial year ends to organize records

• Keep records organized by Financial Year – Track income chronologically from April to March, not calendar year

The one-year gap between earning and assessment exists because income cannot be taxed before it’s fully realized. This systematic approach ensures taxpayers have adequate time to compile financial records and calculate accurate tax obligations after the earning period concludes.

FAQs

Q1. What is the difference between a Financial Year and an Assessment Year in India? 

A Financial Year is the period when income is earned, running from April 1 to March 31. An Assessment Year is the year following the Financial Year, when that income is evaluated for tax purposes. For example, income earned in FY 2024-25 is assessed in AY 2025-26.

Q2. How do I determine which Assessment Year to select when filing my Income Tax Return? 

To select the correct Assessment Year, identify the Financial Year in which you earned the income, then add one year. For instance, if you’re filing for income earned between April 1, 2024, and March 31, 2025 (FY 2024-25), you should select AY 2025-26 on your ITR form.

Q3. Why do Income Tax Return forms use the Assessment Year instead of the Financial Year? 

ITR forms use the Assessment Year because it aligns with the timing of income realization and tax calculation. This system allows for accurate income assessment after the financial year has concluded, accommodating various scenarios that may affect income during the year.

Q4. What are the key dates I need to remember for tax filing purposes? 

The Financial Year starts on April 1 and ends on March 31 of the following year. The deadline for filing your Income Tax Return is typically July 31 of the Assessment Year, which gives you about four months after the Financial Year ends to organize your records and file your taxes.

Q5. How can I avoid confusion between Financial Years and Assessment Years when managing my taxes? 

To avoid confusion, keep accurate records organized by Financial Year (April to March), use the formula AY = FY + 1 to determine the correct Assessment Year, and always select the Assessment Year when filling out tax forms. Stay informed about current tax laws and choose the appropriate ITR form for your income sources.