In income tax parlance, two terms confuse first-time taxpayers – Financial Year (FY) and Assessment Year (AY). Both FY and AY refer to timeframes for filing an income tax return, but each serves a unique purpose. The timeframe of the financial year is the year you earn an income and the assessment year is the year your income is assessed and charged tax.
This blog explains the difference between these two terms in simple, clear language and helps you understand their role in income tax filing in India.
Introduction
For anyone starting their journey with income tax, whether you are a salaried employee, a freelancer, or a small business owner, the terms financial year and assessment year are among the first you will encounter. They are printed on Form 16, used in income tax returns, and mentioned in tax notices. But despite how often they come up, many people confuse the two or use them interchangeably.
It is important to understand that while both refer to 12-month periods used for taxation, they do not refer to the same time. One is about when you earn the money, and the other is about when you report and pay taxes on it.
What is a Financial Year (FY)?
The Financial Year (FY) refers to the 12-month period in which you earn income. It starts on April 1st and ends on March 31st of the following year.
Like, if you earn income between April 1, 2024, and March 31, 2025, that period is known as Financial Year 2024–25.
In India, this financial year system is followed uniformly across businesses, government, and tax authorities. All the financial statements, salary slips, investment proofs, and TDS certificates relate to the financial year.
So, simply we can say that Financial Year = The year in which you earn your income.
What is an Assessment Year (AY)?
The Assessment Year (AY) is the year immediately following the financial year, during which your income is evaluated, assessed, and taxed.
Continuing the same example – If you earned income during FY 2024–25, you will file your income tax return and pay taxes for that income in Assessment Year 2025–26.
It is during this assessment year that the Income Tax Department processes your return, issues refunds, or raises tax demands.
So, Assessment Year = The year in which your income for the previous financial year is assessed.
This difference matters on your ITR. The form will always ask for the Assessment Year, and not your Financial Year.
Why the Distinction Matters?
At first glance, the terms might seem like a formality. But the difference plays a key role in the timing of the tax payments, return filings, assessments, audits, and penalties.
Here is why it matters –
- You earn your income in the financial year
- You file your tax return and pay tax in the assessment year
- Tax rules, exemptions, and slabs applicable during the financial year are assessed in the following assessment year
- Refunds or notices are processed in the assessment year
Key Differences Between Assessment Year and Financial Year
Let us look at a few distinctions to help you remember –
| Aspect | Financial Year (FY) | Assessment Year (AY) |
| Purpose | Period in which income is earned | Period in which income is evaluated and taxed |
| Duration | April 1 to March 31 | April 1 to March 31 (following year) |
| Example | FY 2023–24 (income earned) | AY 2024–25 (income assessed) |
| Tax Return Filing | Income relates to FY | Return is filed in AY |
| Mentioned in Form 16 | Yes, usually marked clearly | Used while filing ITR |
| Used By | Employers, banks, accountants | Income Tax Department |
How These Terms Are Used in Real Life?
These terms are not just technical; they appear in many everyday financial and tax activities –
- Form 16 – Your employer issues this for a particular financial year, summarising salary earned and TDS deducted.
- Form 26AS / AIS – These are annual tax credit statements that refer to income in the financial year.
- Income Tax Return (ITR) – While the income is from the financial year, the ITR is filed for the assessment year.
- ITR Forms & Portals – The income tax portal always uses the assessment year when selecting the return form.
- Scrutiny or Notices – If the tax department finds discrepancies, it issues notices for a specific assessment year.
Being clear about these terms avoids confusion during filing, helps you pick the correct ITR form, and prevents the errors that could lead to penalties.
Common Mistakes Taxpayers Make
- Choosing the Wrong Assessment Year in ITR Filing – For example, selecting AY 2023–24 instead of AY 2024–25 for income earned in FY 2023–24.
- Mismatch in Document References – Using a Form 16 or 26AS meant for another financial year.
- Incorrect Reporting in Business Accounts – For businesses, using the wrong label for transactions can impact financial accuracy.
These mistakes can lead to return rejections, delays in refunds, or unwanted scrutiny.
How to Avoid Confusion?
- Always confirm which year the income was earned, that is, your financial year
- The year in which you file your return for that income is your assessment year
- When filing ITR, select the correct assessment year based on income earned
- Keep a folder for each financial year’s documents – Form 16, bank statements, investment proofs, etc.
- Consult a tax expert or use the income tax portal’s help guides if you are unsure
Conclusion
The terms financial year and assessment year look alike, but their function in the tax process are different. The financial year is when you receive or earn income. The assessment year is the year you declare, assess and pay your taxes on income.
After you follow the steps of the timeline and see the relationship of the two, filing your return is going to be much less confusing. This will be relevant every time you file your ITR, apply for a loan, and submit the Form 16. Understanding this will save time, reduce mistakes, and keep things in line appropriately.
References
The Income Tax Rules, 1962
The Income Tax Act of 1961
