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Introduction to Financial Year, Previous Year and Assessment Year

The Indian Taxation system has its specific terminologies which play a crucial role in the understanding and execution of taxation laws. Among these key terms are 'Financial Year', 'Previous Year' and 'Assessment Year'. Each has its unique relevance, and understanding these concepts can ease the process of income tax planning and filing.


What is a Financial Year?

In India, a 'Financial Year', often abbreviated as 'FY', refers to a period of twelve months beginning on 1st April and ending on 31st March of the subsequent calendar year. The government uses this period for all its budgetary and taxation purposes. For instance, the budget announced in February 2023 relates to the Financial Year from 1st April 2023 to 31st March 2024.



What is a Previous Year?

In the context of Indian taxation, the 'Previous Year' or 'PY' is the financial year in which the income is earned. The Income Tax Act, 1961, stipulates that income tax is charged on the income earned in a particular previous year. For instance, if Mr. A has earned income from various sources such as salary, rent, etc., during the Financial Year 2022-23, then the FY 2022-23 would be considered as the Previous Year for Mr. A.



What is an Assessment Year?

An 'Assessment Year' (AY), according to the Income Tax Act, 1961, refers to the period beginning on the 1st day of April and ending on the 31st day of March of the following year. Essentially, it is the succeeding year to the Financial Year or Previous Year. It is during the Assessment Year that the income earned in the Previous Year is assessed and taxed. For instance, if Mr. A earns an income during FY 2022-23 (Previous Year), it will be assessed in the AY 2023-24.



Correlation Between Financial Year, Previous Year, and Assessment Year

The correlation between Financial Year, Previous Year, and Assessment Year is critical in the context of tax planning and filing. For income earned in a Previous Year (which coincides with a Financial Year), the tax liability is evaluated and finalized in the immediately succeeding Assessment Year. Hence, the tax for income earned in FY 2022-23 (PY 2022-23) would be computed and paid during AY 2023-24.



Relevant Legal Provisions

Section 2(9) of the Income Tax Act, 1961 defines Assessment Year, and Section 3 of the same Act establishes the concept of Previous Year. The understanding of these sections helps in the practical execution of tax calculations and filing procedures.



Impact of the Understanding of Financial Year, Previous Year, and Assessment Year

The clear understanding of Financial Year, Previous Year, and Assessment Year is essential for accurate and lawful tax planning and filing. The confusion in these terms can lead to incorrect tax calculations, non-compliance, and potential legal issues.

For example, if Mr. A, due to a lack of understanding, calculates his tax for AY 2023-24 based on the income earned during FY 2023-24, he will face issues because, as per the Income Tax Act, his tax liability for AY 2023-24 should be based on the income of FY 2022-23.



Conclusion

A profound understanding of terms like Financial Year, Previous Year, and Assessment Year is essential for individuals and businesses in India to comply with taxation laws. The Financial Year is when income is generated, the Previous Year is the financial year in which the income is earned, and the Assessment Year is when this income is assessed for taxation. These three terms are inextricably linked and form the backbone of the Indian tax planning and filing system.

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