Financial Year vs. Assessment Year: Key Differences

Financial Year (FY) and Assessment Year (AY) are two similar and interlinked concepts, but it is crucial to note that they are not the same thing. Filing your tax returns is now easier than ever before thanks to the internet. At the same time, planning for your tax cycle is essential if you want to maximise your savings. India’s Income Tax Act provides multiple provisions for tax deductions. However, these tax saving instruments need to be used at the right time if you want to reduce your overall taxable income.

Understanding the differences between a financial year and assessment year can help you plan for your next tax cycle. Below is a quick guide that explains the differences between these two terms and some ways by which you can save on taxes.

Financial Year

A Financial Year (FY) is the year or period of 12 months in which you earn your income. In India, the financial year starts on April 1st and ends on March 31st of the next year. However, you do not file your income tax returns during the financial year. Instead, taxes for the financial year have to be filed in the next year, which is known as the assessment year.

Assessment Year

The Assessment Year (AY) is the year that follows the financial year. An assessment year will also start from April 1st and end on March 31st of the next year. During the assessment year, you file your income tax returns for the previous financial year.

For example, for FY 22-23, you will file tax returns during AY 24-25.

Financial Year & Assessment Year Run Concurrently

Keep in mind that financial years and assessment years run concurrently. The income you earn is during the year is calculated as part of the financial year, while your tax returns for the previous year are calculated as part of the assessment year. For example, your total income in 2024-25 (From April 1st to March 31st) will be considered as your earnings for FY 24-25. But the tax returns you file in 2024-25 will be for your earnings of FY 23-24.

Your income can only be taxed once you receive it. This is why the assessment year always follows the financial year.

When to Invest in Tax Saving Schemes?

You can invest in tax saving instruments like life insurance whenever you want. However, the tax benefits offered under a plan can only be availed of during the assessment year. For example, if you get a tax saving plan in FY 22-23, then the tax benefits under that plan will be applicable in AY 23-24 when you file for Income Tax Returns.

Let’s say you buy a term plan like Edelweiss Life- Zindagi Protect. Term insurance premiums are tax deductible under Section 80C of the Income Tax Act. You can get deductions of up to ₹1.5 lakhs thanks to this provision. But remember that your deductions will only be applicable from the next year. If you buy your insurance plan in FY 23-24, the premiums you paid will be deducted from your

taxes in AY 24-25. You cannot claim tax deductions for your plan on AY 23-24, as you file tax returns for the previous financial year during that time!

Top Tax Saving Investments in India

Now that you understand the difference between financial year and assessment year, let’s go through some of the popular tax saving investments that you can use to your advantage:

Life Insurance

Life Insurance plans enjoy tax benefits under both Section 80C and Section 10(10D) of the Income Tax Act. Section 80C provides tax deductions on all premiums paid up to an annual limit of ₹1.5 lakhs. Section 10(10D) offers complete tax exemption for your policy’s maturity returns, provided that your plan meets the section’s terms and conditions. Remember that your insurance life cover/death benefit is always tax exempt under Section 10(10D).

Types of Life Insurance Plans That Offer Tax Benefits Include-

• Term Plans- Simple insurance plans that offer life cover for the policy term.
• ULIPs- Unit Linked Insurance Plans (ULIPs) offer life cover alongside market-linked returns.
• Guaranteed Savings Plans- Provide life cover and guaranteed returns at a predetermined rate of interest.
• Participating Plans- Plans where you get life cover and invest in the insurance company. Your returns will be based on your company’s profit declaration.

Equity Linked Savings Schemes

Equity Linked Savings Schemes (ELSS) are mutual funds that offer tax benefits. These schemes generally have a lock-in period of 3 years and provide tax deductions under Section 80C of the Income Tax Act.

National Pension Scheme

National Pension Scheme (NPS) is a government run system that aims to help every Indian develop an adequate retirement corpus. Investing in the NPS is a simple and affordable process. NPS offers tax benefits under Section 80CCD and Section 80CCE.

Please Note: All Tax Deductions (except NPS Section 80CCD) Mentioned Above are Only Applicable Under Old Tax Regime.

Conclusion

Planning your taxes is an important step in ensuring your future financial growth. If you want to avail of tax benefits next year, ensure that you start investing in tax saving instruments now! Remember, your income is calculated in the financial year, but tax returns for that financial year are filed the next year, which will be your assessment year.

 

Swati Tumar - Travel & Finance Writer   

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.