Payment of income tax by individuals or corporations and collection of the same by state and central government is imperative for growth of the Indian economy and equal distribution of wealth and income.
The revenue generated by the government in form of tax levied on income, goods and services is used to fund important government projects and schemes which benefit the public at large. Taxation is generally considered a complicated subject which is thought to be better understood by people from commerce and finance background.
Chartered accountants and other taxation professionals are the ones who give professional advice and individuals and corporations often need help of them for calculating and paying income tax and also for filing purposes. However there is a common saying that nothing is permanent in life except death and taxes.
Common people must have some basic understanding regarding taxation terminology and procedures so that they do not fall prey to malpractices and save themselves from any wrong doing which can have adverse impact later.
Timely payment of income tax and filing the same is not only the duty and responsibility of every citizen but non adherence to the same can attract punitive consequences. In this present article we will discuss about some basic terminology related to income tax and shed light on difference between financial year and assessment year.
Financial year often abbreviated as FY is the period in which the tax payer receives the money on which he is taxed. This is the period starting April 1st and ends on March 31st of the next calendar year. Assessment year is the period in which the tax payer is taxed for the income he receives in a given financial year.
This is generally abbreviated as AY, similar to FY, AY also begins on 1st April and ends on 31st March. The main difference between FY and AY is that AY is the year immediately after FY. We will understand this difference by help of a suitable example. Mr. Ravi is working as a project manager in a leading IT multinational company and earning a salary of 20 Lakhs per annum.
Starting from the financial year April 1st 2019 to March 31st 2020 the income he earns as salary and other perks including income from rent, fixed deposits or buying selling of shares in stock market is taxed in the assessment year starting April 1st 2020 to March 31st 2021.
By referring to the above example this can be said that FY 2019 – 20 is same as AY 2020 – 21. In other words in financial year we earn the income and assessment year is the year immediately following the financial year in which the previous year income is evaluated and taxed.
As discussed in the above paragraph the income earned during the financial year is evaluated and taxed in the assessment year, income tax return forms mentions the AY and not the FY as this is the year when a taxpayer will be filling their returns.
Also while filing ITR one should keep in mind that financial year and previous year is the same thing. Thus the tax payer should not confuse any such terms which filing the return. Lot of things may go wrong if the taxpayer gets confused with such terms and make a wrong selection or declaration of applicable year while filing the return.
The concept of AY immediately following FY can also be understood in this way. Although true for most salaried people, it is not necessary that the income of an individual or corporation is uniform throughout the year, there is always a possible variation.
For individuals, in addition to the uniform salary, it is always possible that in any month of the year the individuals makes a profit from stock market, gets additional rent, loses or changes job, or gets an extra income. Corporations anyways in most cases have seasonal variations in income.
Thus in both cases we can only ascertain the exact income to be taxed after end of the financial year. Thus it is necessary to have the assessment year for taxation purposes after the financial year closes completely. For sake of simplicity we can very well say that AY follows FY because income cannot be evaluated and taxed before it is earned.
The taxpayer as per current income tax slabs should calculate the total taxable income after eligible exemptions as per the Income tax act in the whole financial year and then pay the tax and file a return in the appropriate assessment year.
Any individual earning an income above 2.5 Lacs should necessarily file an income tax return in the apt assessment year. At the time of filing the return they should claim all advance tax, TDS and TCS paid during the financial year. There are many other points which the taxpayer needs to keep in mind before calculating the final income tax payable and filing the return.
A bit of education regarding the same is unavoidable considering the present scenario as it may save a lot of time, effort and money of an individual. Not only that a primary know how of the subject can save an individual from penalties and cases. We will keep coming with variety of articles on this subject as a part of increasing awareness and knowledge on the subject.
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