What is Assessment Year and Financial Year

Most of us face a barrage of financial terms throughout the year during the course of our work, and more so while it comes to filing of Income Tax returns. During this time we most prominently encounter terms like Assessment Year and Financial Year. We are providing simple understanding for Assessment Year and Financial Year for the benefit of Employees as well as people from all section of life, who have the obligation to file Income Tax returns.

What is Financial Year or FY (As it is termed by Income Tax Department of India)

Financial year is the Year in which a person has earned his income. In simple terms, if you have been employed from 01st of April 2009 to 31st of March 2010, then this period is termed as your Financial Year. However it is not restricted only to an employee or an individual. In the Income Tax Of India’s list of Jargon or terms of usage, Financial year is applicable to all entities, whether it is employee, small and medium enterprise, large corporates etc. In fact it is applicable to every entity which generates revenue / or manages revenue (Like Trusts) in a given Financial Year.

It must be understood that in India always the Financial Year starts on 01st of April of every Year, and ends on 31st of March next year.

So, if you have generated income in Financial Year (FY) 2009 – 2010, then it means that you have generated that income between 01st of April 2009 to 31st of March 2010.

What is Assessment Year or AY (As it is called by Income Tax Department of India)

Assessment year is the year in which you file your returns for the Income earned for the financial year, which had just ended.

For example if you are filing income tax returns in July 2010, then you would be filing returns for Financial Year 2009 – 2010 & this is what is called Assessment Year.

Why so?

Please note that you have earned your income in Financial Year 2009 – 2010 (whose definition has been already explained) and you are now approaching Income Tax Department of India for Assessment of Your Income earned in last financial year, in the current financial year which is 2010 – 2011 (As July 2010 falls in the financial year 2010 – 2011, since Financial year 2010 starts on 01st April 2010 and ends on 31st March 2011), that is precisely the reason the Income Tax Department Terms your Assessment of Income as Assessment Year.

In other words, the running financial year (which is 2010 – 2011) is also Assessment Year 2010 – 2011 for the purpose of Income Tax returns submission.