What is the Financial Year in India? A Detailed Overview
The books of accounts get updated for a year. However, the beginning date of this time varies from business to business. The terms "financial year" and "assessment year" may have appeared in your reading of a company's financial statements. Discover what a financial year and an assessment year are, as well as their differences, in this article.
Table of Contents
What is the Financial Year?
A Financial Year (FY), called the fiscal year or accounting year, is a 12-month period in which governments, businesses, and organizations manage their financial operations, that is, monitor and report on their monetary performance. The fiscal year is essential for financial management, planning, and compliance because it enables organizations to check their economic situation, make budgets, set goals, prepare financial statements, and pay taxes on time.
Why Does the Financial Year in India Start on 1st April?
April is the start of a new fiscal year in India. However, have you ever wondered why April is the first month of the calendar instead of January or another month? While some claim it's because April is auspicious, others counter that it's just a practical explanation for the reasons we've listed below. The choice to begin the fiscal year in April was not random, though. Economic factors, cultural customs, and historical occurrences all influence it. Let's examine four key factors contributing to India's distinct fiscal year calendar and its importance to people, companies, and the government.
Corresponding with the crop cycle in India
In India, the fiscal year starts on April 1st and ends on March 31st of the subsequent year. This timetable roughly aligns with the crop cycle in many regions of the nation. India's economy is heavily reliant on agriculture and has always been agrarian. Agricultural activities depend heavily on the monsoon season, which occurs in the country from June to September. Harvests are usually between October and March, with farmers planting seeds in June and July. The government creates plans for the agricultural sector thanks to this synchronization. For instance, the government can announce agricultural policies, allocate subsidies, modify credit policies, and prepare for the acquisition, distribution, and storage of food grains based on the anticipated crop output for the following year. This timeline is beneficial to farmers and businesses involved in agriculture. They can plan their operating expenses and make well-informed decisions by predicting crop yield. In India, the financial year and crop cycle is not only a custom but also a tool that supports agricultural policies and practices.
Following the lunar/Hindu calendar
Vaisakhi, or the Lunar New Year, falls within the same month as India's fiscal year, which runs from April to March. This timing may account for the schedule from April to March. According to some experts, the Indian government may have considered this cultural tradition when choosing these dates. Officials in India may strive for greater cultural unity by establishing the fiscal year to begin with the Lunar New Year.
Influence from Britain
India did not enter the April-to-March fiscal year alone. Instead, the British Empire was involved. Before gaining its independence, India adhered to the British financial calendar. The same idea has been used by the Indian government ever since it gained independence. But British influence goes beyond dates in India's financial system. The British system is the model for many of the current Indian financial policies, including the notions of public debt. Many facets of Indian society and culture still bear the scars of British rule.
Conformity to international standards
Another explanation for India's fiscal year beginning on April 1st may be the necessity for the nation to bring its financial procedures into compliance with international norms. Like other significant economies and trading partners like Canada, New Zealand, the United Kingdom, Hong Kong, and Japan, India has a fiscal year from April to March. International trade and economic interactions are simplified by this adjustment. It is easier for these countries to do business with India.
What Is an Assessment Year?
According to the income tax return for the relevant fiscal year, tax authorities use the Assessment Year (AY) to analyse and determine an individual's or organization's income and tax liability. This crucial stage of the taxation process enables tax authorities to assess the completeness and correctness of the taxpayer's financial data, compute the amount of tax owed, and decide whether any corrections or refunds are required. By giving taxpayers a way to correct mistakes, claim deductions, and resolve any disparities in their tax liability, the assessment year is essential to maintaining tax compliance and equity.
Financial Year and Assessment Year in India
In India, April 1 through March 31 is the fiscal year. The statement will discuss the financial situation from April 1, 2023, to March 31, 2024, if the current fiscal year is FY 2023–2024. Even though the Assessment Year runs from April 1 to March 31, the year taken into consideration will differ from the fiscal year. For instance, income received in FY 2022–2023 will be subject to taxes in AY 2023–2024 (April 1, 2023, to March 31, 2024). This table will help you better understand FY and AY:
Year start on | Year-end on | Financial Year (FY) | Assessment Year (AY) |
1st April 2020 | 31st March 2021 | 2020 – 2021 | 2021 – 2022 |
1st April 2021 | 31st March 2022 | 2021 – 2022 | 2022 – 2023 |
1st April 2022 | 31st March 2023 | 2022 – 2023 | 2023 – 2024 |
1st April 2023 | 31st March 2024 | 2023 – 2024 | 2024 – 2025 |
Differences Between AY and FY
The year an individual receives money for tax purposes is their financial year. The year following the fiscal year, when the revenue from the previous year gets evaluated, taxes get collected, and the ITR is submitted, is known as the assessment year. Financial Year 2022-23 is the fiscal year that starts on April 1, 2022, and ends on March 31, 2023. AY 2023-24 will be the assessment year for FY 2022-23 since the assessment year begins after the financial year concludes.
Why Does the ITR Form Have an Assessment Year?
There are several uses for the assessment year on the Income Tax Return (ITR) form. Taxpayers report their income, deductions, and tax payments for the previous fiscal year, which aids in the accurate computation of taxes. Furthermore, by establishing a reference period for submitting an ITR by the specified deadline, the assessment year guarantees timely compliance. Additionally, it makes tax-related data comparable, which makes it possible to analyse trends and spot differences over time. Determining the statute of limitations for tax assessments and legal actions also depends on the assessment year. It gives the tax authorities time to examine filed tax returns, make necessary corrections, or start audits and investigations. The assessment year is essential for handling income tax refunds and adjusting overpayments. Refunds for overpayments made by taxpayers during the fiscal year are available, guaranteeing equity and offering a way to address any disparities in finances.
What is a Tax Year?
In India's tax system, the Financial Year (FY) and Assessment Year (AY) replace the new term "Tax Year." It lasts 12 months, starting on April 1st and ending on March 31st of the subsequent year. The interesting part, though, comes here:
If you launch your business in the middle of a fiscal year, your tax year starts on that date and ends on March 31st. The Tax Year for income from a new source (such as a rental property or new investment) begins on the day the income starts. It eliminates the confusion between FY and AY and allows you to track your income in a single period.
Implementation of the New Income Tax Bill
Once the Standing Committee and Parliament have approved the new Income Tax Bill, it replace the Income Tax Act of 1961 and go into effect on April 1, 2026. But before the bill gets enacted, it might undergo more changes. The following table shows a comparison between the concepts of financial year, assessment year, and tax year.
Tax Year (New System) | Financial Year (Old System) | Assessment Year (Old System) |
Period for earning and reporting income | Year when income is earned | Year when tax is assessed |
April 1 – March 31 | April 1 – March 31 | April 1 – March 31 (next year) |
Tax is filed after the end of tax year | Refers to income-earning period | Tax return is filed in this year |
Tax Year 2026-27 (Income from April 1, 2026 – March 31, 2027) | FY 2026-27 (Income earned during this period) | AY 2026-27 (Tax return for FY 2025-26) |
As you can see, Tax Year clarifies the tax system and eliminates the additional layer of uncertainty.
Conclusion
As you know, India's fiscal year begins in a specific month, not merely a haphazard choice but a carefully considered one that accounts for the administrative, economic, and agricultural requirements. Selecting the appropriate assessment year for your tax assessment is crucial if you are a first-time taxpayer. You must choose AY 2023-24 if you fill in taxes for the fiscal year 2022–2023. Accordingly, the assessment year is before the fiscal year for which income tax gets assessed.
FAQ
Q1. What is the financial year of India?
The fiscal year (April 1 through March 31) is unaffected while the idea of a tax year gets introduced. The government has cleared that India will not move to a tax system based on the calendar year.
Q2. Why does the financial year in India begin on 1st April, not on 1st January?
The first day of April marks the beginning of the UK fiscal year. Furthermore, because the British dominated India before its independence, the idea remained unchanged after independence and is still used today.
Q3. What are the documents that have to be maintained for the financial year and assessment year?
Maintaining accurate records and paperwork about income, tax payments, deductions, and financial transactions is crucial for the fiscal year. These documents provide proof of the data on the income tax return and might be required for tax audits or future reference. Bank statements, invoices, receipts, pay stubs, investment statements, and pertinent financial statements are documents to preserve.
Q4. Can the financial year and assessment year vary across countries?
Indeed, different countries may have different fiscal and evaluation years. Depending on their unique tax laws and administrative procedures, various jurisdictions may have their own set start and end dates for the fiscal year and assessment year.
Q5. How does the assessment year affect tax refunds?
When processing income tax refunds, the assessment year is crucial. A taxpayer is entitled to a refund in the assessment year if they paid more taxes than needed during the fiscal year. After reviewing the taxpayer's filed return, the tax authorities confirm any overpayments and proceed with the refund.
Q6. Is ‘Financial Year’ concept still used in the Indian tax system?
Yes, in certain situations. Due to their legal and procedural significance, some tax procedures, such as audits, rectifications, and statutory filings, still refer to a Financial Year.
Q7. What is the primary difference between the Tax Year and the Financial Year?
The Previous Year and Assessment Year have been replaced by the Tax Year as the new standard time frame for earning and calculating income. For legal and procedural compliance, including audits and statutory filings, the Financial Year (FY) remains significant.
Q8. When does the new Tax Year system come into effect?
Following the Income Tax Bill 2025, the Tax Year program will operate from April 1, 2026. Taxpayers will no longer file their returns using the previous Financial Year and Assessment Year system; instead, they will do so using the Tax Year as of this date.
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