What is the Difference Between Assessment Year (AY) and Financial Year (FY)

Many people confuse assessment year and financial year, especially while filing their income tax returns (ITR). The financial year refers to the 12-month period in which you earn income, while the assessment year is when that income is reviewed and taxed. Recognising the difference between assessment year and financial year can help you file your ITR correctly and avoid common compliance mistakes. Whether you're a salaried employee or a business owner, clarity on these two tax terms ensures your filings are accurate and timely. 

A financial year is the 12‑month period from 1st April to 31st March during which you earn income such as salary, business revenue, or interest. It’s the year in which you carry out transactions and generate earnings. For example, if you earned salary from 1st April 2024 to 31st March 2025, that is FY 2024‑25. These earnings form the basis for income tax planning and investments under Sections 80C or 10 deductions. 

 

Suppose, Rita joined a company on 15th May 2024 and earned ₹8 Lakhs by 31st March 2025. That ₹8 Lakhs falls under FY 2024‑25 and she can claim deductions paid during that period. 

An assessment year follows the financial year. It’s the 12‑month span from 1st April to 31st March when the income earned in the preceding financial year is evaluated and taxed. So income from FY 2024‑25 is assessed in AY 2025‑26. You file your income tax return in the assessment year. The tax department reviews earnings, deductions, and taxes due for that prior year. 

 

In AY 2025‑26, Rita files ITR for the income she earned in FY 2024‑25 (₹8 Lakhs). She reports investments made in the previous year and pays any tax due or claims a refund. 

Understanding the corresponding AY for each FY is essential for accurate tax filing and compliance. Below is a table showing the assessment year and financial year for recent years to help you track and manage your tax obligations: 

Period	Financial Year	Assessment Year
1st April 2024 to 31st March 2025	2024-25	2025-26
1st April 2023 to 31st March 2024	2023-24	2024-25
1st April 2022 to 31st March 2023	2022-23	2023-24
1st April 2021 to 31st March 2022	2021-22	2022-23
1st April 2020 to 31st March 2021	2020-21	2021-22
1st April 2019 to 31st March 2020	2019-20	2020-21
1st April 2018 to 31st March 2019	2018-19	2019-20

Understanding the distinctions between the two periods is essential for effective tax planning and compliance. Below is a table summarising their key differences and roles: 

Financial Year vs Assessment Year

Parameter	Financial Year (FY)	Assessment Year (AY)
Definition	12‑month period (1 Apr–31 Mar) in which income is earned	The next 12 months (1 Apr–31 Mar) when that FY’s income is assessed
Main Purpose	Track income, expenses, and investments during the year	File ITR, assess tax liability, possibly pay due taxes or get refunds
Relation to Tax Filing	Income is earned and deductions claimed in this period	Tax return is filed and reviewed; TDS, self-assessment happen now
Example	FY 2024‑25 = 1st Apr 2024 – 31st Mar 2025	Corresponding AY 2025‑26 = 1st Apr 2025 – 31st Mar 2026

The latest Union Budget has brought welcome relief to salaried individuals under the new tax regime for financial year 2025‑26, with enhanced deductions and revised tax slabs focusing on middle-income earners.

Enhanced Deductions (New Tax Regime)

• Section 87A rebate increased: 

Section 87A now offers a full rebate of up to ₹60,000 for taxable income up to ₹12 Lakhs, effectively making income up to ₹12 Lakhs tax-free. 

• Zero-tax income Limit Increased: 

Indian citizens earning up to ₹4 Lakhs will now get a full tax exemption on their income under the new regime. 

Updated Income Tax Slabs (New Regime)

The Finance Minister also introduced a revised tax structure under the new tax regime: 

Taxable Income (₹)	Tax Rate (%)
Up to ₹4,00,000	Nil
₹4,00,001 – ₹8,00,000	5%
₹8,00,001 – ₹12,00,000	10%
₹12,00,001 – ₹16,00,000	15%
₹16,00,001 – ₹20,00,000	20%
₹20,00,001 – ₹24,00,000	25%
Above ₹24,00,000	30%

 

Example

Consider Ajay, a salaried Indian citizen with a total annual salary of ₹10 Lakhs. Let’s see how his tax liability changes from before and after the Union Budget. 

Before Budget 2025‑26 (New Regime):

• Gross salary: ₹10,00,000
• Standard deduction: ₹75,000 → Taxable = ₹9,25,000
• Tax:
  • 5% on ₹4,00,000 (₹4–8 lakhs) = ₹20,000
  • 10% on ₹1,25,000 (₹8–9.25 lakhs) = ₹12,500
  • Total tax = ₹32,500 → No rebate (87A max ₹25,000)
  • Net tax = ₹7,500 + cess

After Budget 2025‑26 (New Regime):

• Gross salary: ₹10,00,000
• Standard deduction: ₹75,000 → Taxable = ₹9,25,000
• Tax (same slab rates): ₹32,500
• Rebate u/s 87A: ₹32,500 (full rebate applies up to ₹12 Lakhs)
• Net tax payable = ₹0

Here are five key reasons why understanding the difference between assessment year and financial year matters for Indian taxpayers: 

• Timely Tax Filing & Compliance: Knowing the assessment year and financial year correctly ensures you file your ITR during the correct income tax assessment year. Late filing in AY 2025‑26 for FY 2024‑25 assets may invite penalties and interest charges. 
• Accurate Claiming of Deductions: Investments and eligible expenses made in the financial year can be claimed in the ensuing assessment year. Without clarity, you might miss tax-saving opportunities under Sections 80C or 80D.
• Proper Tax Assessment: The AY is when the tax department reviews your FY income. Correct identification ensures self-assessment, TDS adjustments, and accurate refunds.
• Avoidance of Errors in ITR Forms: Selecting wrong years on ITR forms can trigger mismatched income or TDS claims. Understanding the distinction prevents errors in tax data. 
• Better Financial & Tax Planning: Once a financial year closes, the assessment year begins. This is a key time for tax planning, making advance tax payments, and preparing for the FY ahead. 

Use-Case Scenario

Arun started an IT consultancy in FY 2024‑25 (1 Apr 2024–31 Mar 2025). He earned ₹20 Lakhs and invested ₹2 Lakhs in PPF and health insurance. He saved all receipts and filed his ITR in AY 2025‑26 (by July 31, 2025). 

Because he understood financial year vs assessment year, Arun claimed ₹2 Lakhs in deductions correctly. The tax department reviewed his AY paperwork, processed his refund, and confirmed no additional tax was due. He avoided penalties, improved cash flow, and stayed fully compliant. 

Go through the following examples to understand how these two periods function in tax forms:

• Specify the assessment year when selecting the ITR form (e.g., AY 2024-25 for income from FY 2024-25). 
• Report income earned during the financial year in the ITR form (e.g., FY 2024-25). 
• Claim deductions applicable to the financial year in the ITR (e.g., contributions from FY 2024-25). 
• Calculate tax liability based on income from the financial year, assessed in the assessment year. 
• Follow filing deadlines based on the assessment year (e.g., 31st July 2025 for AY 2025-26).