Assessment Year Vs Financial Year - Know the Difference Now!

The objective of the Income Tax Bill 2025 is to simplify India’s tax framework and make adherence easier for taxpayers. This bill proposes to unify the concept of “tax year,” replacing the current confusion between the Financial Year (FY) and Assessment Year (AY).

The tax year will be 12 months, starting from April 1 and concluding on March 31.

• The tax year for newly established businesses will begin on the date of incorporation.

• In the case of new income sources, the period starts from when the income was first earned.

The bill has also extended the deadline for updating the ITR (ITR-U). Taxpayers can now revise and update their Income Tax Returns (ITR-U) for 4 years, instead of 2. This amendment allows for greater flexibility in tax compliance.

The financial year is the period in which you earn your income and pay your taxes in advance. The financial year typically lasts 12 months, from April 1 to March 31. The start and end dates of the financial year are fixed and do not change.

For example, if you say an income is earned in the financial year FY 2023-24, it means the income is earned between 01st April 2023 to 31st March 2024.

Hence, the financial year is crucial because it determines the taxpayer's income and tax slab. During this year, you must estimate your income, calculate your tax liability, pay your tax in
advance, and claim tax benefits.

The Income Tax Department will collect your tax and issue tax certificates during the financial year.

Keep the following pointers in mind when filing returns during the financial year.

Using the provisional tax return option, you can file taxes during the financial year. This option allows you to estimate your income and tax liability for the current financial year and file your tax return accordingly.

You can use this option at any time during the financial year, but it is recommended to do so before the end of the third quarter (December 31).

You may opt for an advance tax option to pay your tax liability ahead of the due date. This option allows you to pay your tax liability in four instalments during the financial year, based on your
estimated income and tax slab. The details of this option are outlined below.

You can claim tax benefits during the financial year using the tax deduction and tax exemption options. These options enable you to reduce your taxable income and tax liability by investing in specific schemes or incurring certain expenses. Some of the common tax deductions and exemptions are as follows:

[Note: Please note that some tax deductions and exemptions are only available under the old tax regime, for example, Section 80D and 80C deductions and will not be applicable if you have opted for the new tax regime (the default tax regime).]

Also Read: Tax Saving Options Other Than 80C

The assessment year is the period in which your income tax is assessed and processed by the Income Tax Department. It is the year following the financial year in which you earned the income.

For example, if you earned income in the financial year 2023-24, your assessment year will be 2024-25. The duration of the assessment year is also 12 months, starting on April 1 and ending on March 31. The deadline for filing your tax return for the assessment year is July 31 unless extended by the government.

Here are some examples of income earned in different financial years and their corresponding assessment years:

Keep the following pointers in mind when filing returns during the assessment year.
You can choose between the old and new tax regimes, depending on your income level and deductions. The old tax regime allows you to claim various deductions and exemptions from multiple sections, but has higher tax rates.

The default or new tax regime has reduced tax rates but does not allow for most deductions and exemptions. You can compare the tax liability under both regimes and choose the one that suits you best.

You need to report your income from foreign assets and income, if any, and pay tax on them per the Double Taxation Avoidance Agreement (DTAA) with the respective country.
Report your income from virtual digital assets (VDA) or cryptocurrencies, if any, under the capital gains head.

Disclose your bank account details, except dormant ones, and the interest income earned from them.

Choose the appropriate form for filing your tax return during the assessment year based on your income source and tax status.

Also Read: Tax Deductions And Exemptions Under The New Tax Regime

Although you now have a clear understanding of the distinctions between the two years, here is a summary of the differences between the assessment year and the financial year.

This example will help you understand the differences between the financial year and the assessment year. The financial year 2024-25 starts from 1 April 2024 and ends on 31 March 2025.
You can classify the income earned during this period into five heads: salaries, business income, income from house property, capital gains, and income from other sources.

Once the financial year ends, the assessment year begins. Therefore, the assessment year commences on 1 April 2025 and concludes on 31 March 2026. Your income is assessed and taxed this year. You must file your income tax returns and pay your self-assessment tax due by 15 September 2025.

The following table further teaches the assessment year and financial year difference by mentioning them for specific periods.

When understanding assessment year vs. financial year, another crucial thing you need to be aware of is the penalty associated with ITR filing.

Section 234F imposes a late fee on taxpayers who file their ITRs after the due date. The late fee is ₹5,000 for taxpayers with a total income exceeding ₹5,00,000 and ₹1,000 for taxpayers with a total income up to ₹5,00,000. The late fee is applicable if the ITR is filed by 31st December 2023.

If the ITR is filed after 31st December 2023 but before 31st March 2024, the late fee is increased to ₹10,000. However, the maximum late fee can be at most ₹1,000 for taxpayers with a total income up to ₹5,00,000.

Section 234A levies interest on the unpaid tax amount at the rate of 1% per month or a portion of a month from the due date of filing till the date of actual filing.

The interest is computed on the net tax liability, i.e., the tax payable after deducting the tax deducted at source (TDS), tax collected at source (TCS), self-assessment tax, and advance tax. The interest is applicable even if there is no tax liability, but the ITR is filed after the due date.
Section 271F empowers the income tax officer to impose a penalty of ₹5,000 for failure to file the ITR within the due date. However, this section has been repealed from AY 2018-19 onwards and replaced by section 234F.

Section 276CC provides for the prosecution and imprisonment of taxpayers who fail to file their ITRs within the due date despite receiving notices from the income tax department.
The imprisonment can range from three months to two years, along with a fine. If the tax liability exceeds ₹25,00,000, the imprisonment can extend up to seven years, along with a fine.

Apart from the penalties and interest, there are other implications of late filing of ITR, such as:

Loss Carry Forward of Losses: Taxpayers who incur losses under the heads of capital gains or business and profession can carry forward these losses for up to eight years and set them off against the income of those years.

However, this benefit is available only if the ITR is filed within the due date. Late filing of the ITR can result in the forfeiture of the carry-forward of losses, except for the loss from house property.

Delay in Refunds: Taxpayers who have paid excess tax, either through TDS, TCS, advance tax, or self-assessment tax, are entitled to receive a refund from the income tax department.
However, the refund is processed after the ITR is filed and verified. Late filing of ITR can delay the receipt of the refund and the interest on the refund amount.

Disallowance of Deductions: Taxpayers who claim deductions under various sections, such as sections 80C, 80D, and 80G, must file their ITR within the due date to avail themselves of the benefits of these deductions.

Late filing of ITR can lead to the disallowance of these deductions and increase the tax liability.

The taxation process involves two different but related periods: the financial year and the assessment year. The financial year is the period from April 1 to March 31, when people earn income and pay taxes on it.

The assessment year follows, during which tax authorities evaluate and process taxes. It is essential to be aware of these periods for effective tax planning and compliance. You can claim deductions under various sections when filing your taxes in the assessment year, including under Section 80D for premiums paid for a health insurance plan.

You can buy health insurance online from TATA AIG to get a maximum deduction of ₹1,00,000. Moreover, our cashless medical insurance plans cover treatment available at any hospital of your choice for insured diseases and events.

So, what are you waiting for? Get health insurance plans for family and claim relevant deductions on the premiums paid when you file your income tax return.