What is a Financial Year?
Table of Contents
Introduction
A financial year is a 12-month period used for accounting and financial reporting purposes. It is the timeframe during which a company records its financial transactions, prepares its financial statements, and calculates its taxes.
The financial year does not necessarily coincide with the calendar year. In many countries, including the United States, the financial year ends on December 31, which is the end of the calendar year. However, in other countries, such as the United Kingdom and Australia, the financial year runs from April 1 to March 31.
The length of a financial year can also vary depending on the type of organization. For example, some non-profit organizations may have a fiscal year that runs from July 1 to June 30 to coincide with their grant cycles or fiscal years.
The financial year is important because it provides a consistent and predictable timeframe for financial reporting and planning purposes. It allows companies to compare their financial performance over multiple years, identify trends, and make informed decisions about future investments and strategies.
What is an Assessment Year?
Form 16 is a certificate issued by employers to their salaried employees, which shows the details of the salary income and the tax deducted at source (TDS) on it. It has two parts: Part A and Part B. Part A contains the information about the employer, the employee, and the quarterly TDS deposited with the government. Part B contains the breakdown of the salary components, the exemptions under Section 10, and the deductions under Chapter VI-A. Form 16 is an important document for filing income tax returns, as it shows the amount of tax already paid and the amount of tax liability, if any. Form 16 is usually issued by 15th June of the year for which it is being issued.
Some additional sentences are:
- If you have changed your job in a financial year, you should get Form 16 from both your employers.
- You can also download Form 16 from the TRACES portal, if your employer has generated it online.
- If you lose your Form 16, you can request a duplicate copy from your employer or use other documents such as salary slips and bank statements to file your return.
What is an Assessment Year?
An assessment year is a time period during which an individual’s or company’s income tax liability is assessed and paid. It is based on the financial year, but it does not necessarily coincide with it.
In India, the assessment year is defined as the period starting on April 1 of a given year and ending on March 31 of the following year. For example, the assessment year for financial year 2020-21 (April 1, 2020, to March 31, 2021) is from April 1, 2021, to March 31, 2022.
During the assessment year, the tax authorities review the individual’s or company’s income tax returns and calculate their tax liability for the previous financial year. They may also conduct audits or investigations to ensure compliance with tax laws.
The Indian Financial Year
The Indian Financial Year (FY) is a 12-month period used for accounting and financial reporting purposes in India. It begins on April 1 and ends on March 31 of the following year.
In India, the FY is different from the calendar year, which is commonly used in many other countries. This difference can sometimes cause confusion, as it means that financial statements and tax returns for Indian entities may be prepared and filed during a different timeframe than those of their foreign counterparts.
The Indian FY is significant because it aligns with the country’s agricultural cycle, which is heavily dependent on monsoon rains that typically occur between June and September. This timing allows farmers to plan and manage their finances based on the availability of funds during the harvest season.
Additionally, the Indian FY is consistent with the country’s tax year, which is also based on the assessment year (April 1 to March 31). This alignment simplifies tax compliance for businesses and individuals, as they only need to file one set of financial statements and tax returns each year.
Difference Between AY and FY
The Assessment Year (AY) and Financial Year (FY) are two important terms in the Indian tax and accounting system, but they are different from each other.
The Financial Year (FY) is a 12-month period used for accounting and financial reporting purposes in India. It begins on April 1 and ends on March 31 of the following year. This period is used to prepare financial statements, such as balance sheets and income statements, for businesses and other organizations.
On the other hand, the Assessment Year (AY) is a period during which the income tax liability for the previous financial year is assessed and collected by the tax authorities. It also begins on April 1 and ends on March 31 of the following year. This means that an individual’s or company’s income tax return for the previous FY is assessed during the current AY.
Why does ITR form have an Assessment Year?
The Income Tax Return (ITR) form in India is designed to help individuals and entities report their income and taxes paid during a specific financial year (FY) to the tax authorities. However, the assessment of the tax liability for the previous FY is carried out during a separate period called the Assessment Year (AY).
The AY is important because it allows the tax authorities to verify and scrutinize the income tax returns filed by individuals and entities during the previous FY. The AY provides the tax authorities with sufficient time to complete the assessment process, as they may need to request additional documents or information from the taxpayers.
As a result, the ITR form in India includes fields for reporting income and taxes paid during the previous FY, which corresponds to the current AY. This allows individuals and entities to accurately report their income and taxes paid during the previous FY, which will be assessed during the current AY.