There comes a time of year where individuals and corporations have to file their income tax returns. It is during this time that the terms financial year and assessment year are discussed in great detail. It is important to understand the meaning of financial year and assessment year for any party who wishes to file income tax returns. The terms financial year and assessment year are closely related even though they are quite different from one another. The article that follows offers a good explanation of each term and highlights their differences.
Financial Year
The financial year is the 12 month period in which a corporation earns their income. It is during this period that year financial reporting is done. Financial information has to be reported on a yearly basis (this is usually mandated by government and accounting bodies) and the year in which the financial information is recorded in called the financial year. Financial year for an individual will be a year from the date of employment. As for a corporation, the financial year can change depending on the company or the country in which the company operates. For example in the USA the financial year is from January to December; however, in countries such as India the financial year starts in April and ends in March.
Assessment Year
The assessment year is the year in which income tax returns are filed for the income that was earned in the financial year that ended. For example if a US corporation has a financial year from January 2012 to December 2012, the income tax returns would be filed in 2013 and January 2013 to December 2013 will be the assessment year for which tax returns were filed for the income earned in the financial year that passed. The government provides tax payers a reasonable period of time to correctly calculate the amount that is to be paid to the government as income tax.
What is the difference between Assessment Year and Financial Year?
Financial year and assessment year are both concepts that are closely related to one another when discussing income tax returns. A financial year is the current year in which income is earned, and financial reporting is done. Assessment year is the year following the financial year in which tax returns are filed for the income that was earned in the financial year. Therefore, a corporation will earn its income in the current financial year and then pay the taxes on that income on the following year known as the assessment year. However, it must be noted that this is not the case for an individual’s salary as taxation on salary is made immediately before it is handed over to the employee. However, for other sources of income such as capital gains, property gains, and fixed deposit interest, the tax will be charged in the assessment year.
Summary:
Assessment Year vs. Financial Year
• Financial year and assessment year are both concepts that are closely related to one another when discussing income tax returns.
• The financial year is the 12 month period in which a corporation earns their income. It is during this period that year financial reporting is done.
• The assessment year is the year in which income tax returns are filed for the income that was earned in the financial year that ended.