Financial Year and Assessment Year in India: Meaning, Differences, AY vs FY Explained with Examples

Every March, when you open the ITR portal, you reach the dropdown for “Assessment Year” and pause. Why does it ask for the next year instead of the one you actually earned your money in? This confusion leads to wrong year selection, delayed refunds, and compliance issues. Understanding the difference between the financial year and the assessment year is crucial for accurate ITR filing. Once you see how they connect, navigating India’s tax structure becomes straightforward.

What is a Financial Year (FY)?

The full form of FY is Financial Year. It’s the 12-month period in which you earn your income, make investments, and pay premiums. The Indian financial year is from the 1st of April of a year to the 31st of March of the next year. This April-to-March cycle aligns with the national budget and has been India’s standard accounting period since 1867.

Most salary slips, investment receipts, and tax-saving decisions tie directly to this window. You have until the 31st of March each year to make investments and claim deductions under Section 80C, 80CCC, and 80CCD.

What is an Assessment Year (AY)?

The full form of AY is Assessment Year. It’s the 12-month period immediately after the financial year, when the Income Tax Department reviews and taxes the income you earned in the previous FY. If your FY is 2024-25, your assessment year is AY 2025-26. When you file your Income Tax Return (ITR), you always select the Assessment Year. That’s how the system matches your return to the right filing period, links your Tax Deducted at Source (TDS) credits, and processes your refund.

What is a Previous Year (PY)?

You may come across “Previous Year” in tax notices or under the Income Tax Act, 1961, and wonder if it differs from the financial year. It doesn’t. This is simply the formal legal term for the year in which you earned your income. ITR forms call it the financial year. Legal documents call it the previous year. Both refer to the same period. Knowing this prevents confusion if you receive a formal tax notice that uses this term instead.

FY vs AY: Key Differences Between Financial Year and Assessment Year

Here’s a clear side-by-side comparison of the difference between assessment year and financial year:

You earn and act in the FY. You file and get assessed in the AY.

2025-26 Note: Under the new tax regime, most deductions under Section 80C are not available. If you have opted for the new regime. However, the deductions are available under the old tax regime, it does. Check which regime applies to your ITR before making your investments.

Understanding “Tax Year” in India

You may have come across the term “tax year” while reading about taxes online or using financial platforms. This can sometimes create confusion when compared with the financial year vs assessment year structure in India.

Globally, countries like the US and UK commonly use the term “tax year” to describe the period for income and taxation. In India, however, the system continues to follow the Financial Year (FY) and Assessment Year (AY) framework as defined by the Income Tax Department.

That said, in recent years, the term “tax year” is increasingly used in informal communication, fintech platforms, and educational content to simplify understanding for taxpayers. It is often used as a general reference to the financial year in which income is earned.

Important to note: 
For official purposes, including income tax return filing in India, you must still use the correct assessment year (AY) while filing your return on the Income Tax portal.

This evolving usage reflects an effort to make tax concepts easier to understand, especially for first-time filers, while the underlying system remains unchanged.

Example Explaining FY and AY

Let’s put this into a simple timeline. You’re a salaried professional. Between the 1st of April 2024 and the 31st of March 2025, your salary arrives monthly. You pay premiums on your term insurance plan, which qualify for term insurance tax benefits under Section 80C, and make other tax-saving investments. That’s FY 2024-25.

From the 1^st of April 2025, you file your return for that income. The year on the ITR form is AY 2025-26. Selecting AY 2025-26 ensures your deductions, including tax benefits of life insurance, apply to the correct earning period.

Why Does the ITR Form Ask for the Assessment Year?

When you sit down to file your return, the earning year has already ended. The ITR portal asks for the assessment year because your complete income picture (salary, investments, and TDS deducted) can only be reconciled after the financial year closes.

Under the Income Tax Act, 1961, income earned in the previous year is assessed and taxed in the assessment year that follows. The portal uses the AY to link your return to the right filing period, track compliance, and process your refund. Selecting the wrong assessment year sends your return to the wrong period entirely. This matters especially when claiming exemptions under Section 10 of the Income Tax Act. An incorrect AY can delay your benefits.

Always confirm deadlines on the official Income Tax portal before submitting.

Important Note on Tax Regimes

Under the new tax regime, many deductions—including those under Section 80C—are not available.

This means:

• The traditional 31st March tax-saving rush may not apply in the same way  
• Your strategy depends on whether you opt for the old or new regime  

However, under the old regime, tax benefits of life insurance continue to play an important role in reducing taxable income.

Final Thoughts

The Financial Year is when you earn and plan. The assessment year is when the Income Tax Department reviews and taxes that income. Keep this distinction clear, and selecting the correct year on your ITR becomes straightforward. As you plan each financial year, explore Bandhan Life’s life insurance plan for reliable protection.

FAQs on Financial Year and Assessment Year

Why are FY and AY separate?

Income can only be fully calculated once the earning year ends. The assessment year gives you and the Income Tax Department a clear window to review, file, and process returns accurately after the Financial Year closes.

What is the assessment year for FY 2025-26?

The assessment year for FY 2025-26 is AY 2026-27. You file income earned between the 1st of April 2025 and the 31st of March 2026 during AY 2026-27. For salaried individuals, the standard ITR filing deadline is the 31st of July 2026. Always confirm the year on the official Income Tax portal before submitting to avoid your return going to the wrong cycle.