What is a Financial Year?

Introduction

Financial Year (FY) is an important concept in India. It defines the period a business or organization reports its financial results. Knowing when the financial year begins and ends is essential because it helps businesses plan their budget, monitor income and expenditure throughout the year, and determine tax liabilities at the end of each financial year. 

Therefore, understanding this concept can help any Indian citizen, both financially and legally. Understanding what a Financial Year means also provides insight into how businesses work in India. So what is the Financial Year in India, and why should you know about it? Read on to find out!
 

What is a Financial Year?

Businesses and other organizations use a financial year, more commonly known as a fiscal year, to track their monetary activities over the course of 12 months. Every twelve months in India, the financial year starts on April 1 and finishes on March 31. This is because the Indian Government follows a yearly cycle to compute taxes due as well as any other monetary responsibilities.

A financial year is to make it easier for businesses and other organizations to compare their yearly financial performance against the same period in previous years. For example, suppose a business’s income increases dramatically in March compared to February. In that case, they can easily identify this trend by analysing their financial statements from the current financial year and prior years. This allows them to make better-informed decisions regarding their investments, expenditure and the future direction of their business.
 

What is an Assessment Year?

An Assessment Year (AY) refers to twelve months used in India for taxation. Just as fiscal years last from April 1st to March 31st of the following year, this concept operates on a similar timeline. However, the assessment year does not begin at the same time as the financial year – its start date lies one calendar year after that of a financial year’s start date. For example, AY 2021 will be based on Financial Year 2020–21 (1 April 2020 to 31 March 2021).

In short, while an assessment year determines when your income tax return needs to be filed and taxes paid, the financial year denotes when it was earned or invested.
 

The Indian Financial Year

In India, the financial year runs from April 1st to March 31st every year, and all taxes are collected based on this timeline. To simplify understanding, here is a breakdown of financial years for recent years:

|Financial Year |Start Date |End Date |
|---------------|-------------|-------------|
|FY 2020-21 |1st April 2020|31st March 2021|
|FY 2019-20 |1st April 2019|31st March 2020|
|FY 2018-19 |1st April 2018|31st March 2019 |
 

Difference Between AY and FY

Mentioned below are the major differences between AY and FY

1. Definition

AY stands for Assessment Year, and FY stands for Financial Year. AY is the year in which an individual assesses their taxes and files their tax returns, while FY is a 12-month period used for calculating income and expenses for taxation purposes. In other words, AY refers to the year in which one must pay taxes on income earned during the financial year (FY).

2. Time Span

The time span of AY is always one year more than that of FY. For example, if the financial year 2020–2021 runs from April 1st 2020 to March 31st 2021, then the corresponding assessment year would be 2021–2022. This simply means that taxpayers would have to file their tax returns for the financial year 2020–2021 by March 31st 2022.

3. Applicability

AY is a widely used term in India, while FY has expanded its reach to many other countries across the globe. It is important to understand that countries may use different fiscal and assessment years. For example, in India, the financial year typically runs from April 1st to March 31st of the following year. Other countries like the United States may use January 1st as their start date for a new fiscal year.
 

Why does ITR form have an Assessment Year?

The Income Tax Return (ITR) form includes an Assessment Year because it enables taxpayers to report their income for a certain tax year. An Assessment Year is typically one year later than the Financial Year. The Revenue Department uses it to review the income, deductions and taxes that were due during the relevant Financial Year. This way, taxpayers can conveniently file their returns and also reflect any changes in their income, deductions or credits as applicable after the Financial Year has ended. 

This helps maintain consistency in records while filing ITRs each year and allows Revenue departments to more easily identify discrepancies between what was reported earlier and now. So, having an Assessment Year mentioned in your ITR form ensures the accuracy and completeness of your returns throughout multiple years.
 

The Bottom Line

India's financial year is important to the country's economic and business system. By understanding the nuances of India's financial year, businesses can ensure they comply with local regulations and make informed decisions for their operations. With this knowledge, companies can better plan ahead to maximize profitability and reach their goals. So, familiarise yourself with the Indian financial year and get ready to reap the rewards.