FY and AY Demystified: Filing Your Taxes the Right Way

FY and AY Demystified: Filing Your Taxes the Right Way

When it comes to filing income tax, the terms' Assessment Year' and 'Financial Year' often create confusion. Although closely linked, they refer to two distinct periods in the tax cycle. This blog explains what each term means, how they relate to your income and tax filing, and why understanding the difference is essential for every taxpayer.

What is a Financial Year (FY)?

A Financial Year (FY) is the 12-month period during which you earn income and carry out financial transactions. In India, the financial year starts on April 1 and ends on March 31 of the following year.

For example, FY 2024–25 refers to income earned between April 1, 2024, and March 31, 2025. All income—whether from salary, business, or investments—is recorded during this period.Tax planning tips, deductions, and investments are also made within this window. Your income for this year is assessed and taxed in the following assessment year.

What is an Assessment Year (AY)?

An Assessment Year (AY) is the year that immediately follows the Financial Year, during which the income earned is assessed and taxed. For example, for income earned in FY 2024–25, the assessment year would be 2025–26. This is when taxpayers file returns, claim deductions, and settle any tax dues. This year, the government uses the opportunity to evaluate your total income, verify taxes paid or pending, and issue refunds if applicable. While the financial year is when you earn the income, the assessment year is when it is officially reviewed and processed by the tax department.

Difference Between Financial Year and Assessment Year

Basis of comparison	Financial Year (FY)	Assessment Year (AY)
Definition	The year in which income is earned	The year in which income is assessed and taxed
Time Period	April 1 to March 31	Immediately follows the financial year
Example	Income earned from April 1, 2024 – March 31, 2025	Income assessed in AY 2025–26 for FY 2024–25
Purpose	To record income, expenses, and investments	To evaluate and file returns based on previous FY’s income
Relevance to taxpayers	Used for planning taxes and making eligible investments	Used for filing returns and completing tax compliance
Who uses it	Taxpayers and businesses	Income Tax Department and taxpayers

Importance of Knowing Your Assessment Year

• Helps You File Returns Accurately

Knowing the correct assessment year ensures that your income is reported and taxed in the right period.

• Avoids Penalties and Notices

Incorrect AY entries while filing can lead to processing delays, penalties, or income tax notices.

• Required for Claiming Deductions

All deductions, exemptions, and tax credits are claimed in the assessment year—not the financial year.

• Critical for Tracking Refunds

Refunds are processed in the AY. Using the incorrect year can delay or prevent the issuance of a refund.

• Mandatory for Tax Payments and Challans

Tax payments, such as advance tax or self-assessment tax, must be linked to the correct assessment year (AY) while paying through challans.

• Essential for Form 16, 26AS, and ITR

Your Form 16, Form 26AS, and Income Tax Returns all refer to the assessment year for income earned in the previous FY.

Examples Illustrating FY and AY

Let’s say you earned income between April 1, 2023, and March 31, 2024. This period is known as the Financial Year (FY) 2023–24. The income earned during this year will be assessed and taxed in the Assessment Year (AY) 2024–25.

Here’s another example: If you made investments or paid insurance premiums in FY 2024–25 (April 1, 2024 to March 31, 2025), you will claim those deductions when filing your taxes in AY 2025–26.

In simple terms, the financial year is when you earn and invest, while the assessment year is when you report and pay taxes on it.

Impact of FY and AY on Income Tax Filing

Filing your income tax return requires a clear understanding of which financial year the income was earned in and which assessment year it will be reported under. Using the incorrect assessment year in your return or payment challan can result in delays, errors in tax credit, or even penalties.

For salaried individuals, business owners, and investors alike, selecting the correct year ensures that tax payments are correctly tracked and matched by the income tax department. It also provides timely processing of refunds and avoids the hassle of rectifying mistakes later. In short, it’s a small detail with a significant impact.

Common Mistakes Related to FY and AY

1. Using the assessment year in place of the financial year while mentioning the income period

2. Selecting the wrong year while paying taxes online through challans

3. Filing returns under the wrong AY, leading to return rejection or notices

4. Confusing AY with FY while claiming deductions or exemptions

5. Mismatching income and investment proofs with the wrong fiscal period

6. Referring to Form 16 or 26AS for the wrong year

7. Not updating software or accounting records with correct FY/AY mapping

Recent Changes: Introduction of the 'Tax Year' Concept

To reduce confusion between FY and AY, the government has begun referencing a unified term: Tax Year. While not yet formally defined in the Income Tax Act, the term is increasingly used in communication to help simplify taxpayer understanding. For example, instead of saying FY 2024–25 and AY 2025–26, authorities may simply refer to it as Tax Year 2024–25. This aligns with global practices and offers a cleaner way to present tax periods. While the legal structure of AY and FY remains unchanged, this language shift may soon be reflected in documentation, tools, and taxpayer interfaces across portals.

Navigating FY and AY for Effective Tax Planning

Understanding the distinction between fiscal year (FY) and accounting year (AY) is essential for accurate tax filing, avoiding penalties, and maximising deductions. Whether you’re filing returns, claiming exemptions, or planning investments, aligning with the correct years ensures smoother compliance and better financial planning. It's a simple shift in awareness that saves time and errors.

FAQs on Financial Year and Assessment Year

1. What is the difference between a Financial Year and an Assessment Year?

The financial year is the period during which you earn income, typically from April 1 to March 31. The assessment year follows it and is when you file returns and pay taxes on that income. For example, revenue in FY 2024–25 is assessed in AY 2025–26.

2. Why is it important to know your Assessment Year?

Knowing your assessment year ensures you file returns for the correct income period, claim deductions properly, and avoid tax mismatches or delays. Mistakes in identifying AY can lead to return rejection, delayed refunds, or non-compliance notices from the Income Tax Department.

3. How do FY and AY affect income tax filing deadlines?

Income earned in a financial year must be reported in the assessment year. Filing deadlines apply to the assessment year—usually July 31 for individuals. Using the wrong AY may lead to failed submissions or incorrect tax payments.

4. What is the new 'Tax Year' concept introduced in the Income Tax Bill 2025?

The 2025 bill proposes using "Tax Year" to simplify communication, combining the concepts of financial and assessment years into a single term. Although not yet legally replacing FY or AY, it aims to reduce confusion and align with global tax terminology.

5. Can the Assessment Year and Financial Year be the same?

No, the financial year is always followed by its assessment year. For instance, income earned in FY 2023–24 is assessed in AY 2024–25. They refer to different periods and cannot overlap or be the same year.

AN JUL 39/25