Definitions of important terms in the Income Tax Act i.e. Assessment Year (A.Y), Financial Year (F.Y) & Previous Year has been explained in this article. Generally tax payers confuse about the terms Assessment Year (A.Y), Financial Year (F.Y) & Previous Year. What is Assessment Year (A.Y), What is Financial Year (F.Y) and What is Previous Year are explained below with suitable examples. Differences between AY, FY & PY are defined in the Indian Income Tax Act 1961.
Also Read : List of Sections of Income Tax Act 1961
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Recent Financial Period India – AY, FY & PY
|Period||Previous year||Financial Year||Assessment Year|
|1 April 2019 to 31 March 2020||2018-19||2019-20||2020-21|
|1 April 2018 to 31 March 2019||2017-18||2018-19||2019-20|
|1 April 2017 to 31 March 2018||2016-17||2017-18||2018-19|
|1 April 2016 to 31 March 2017||2015-16||2016-17||2017-18|
Current Assessment Year (AY) is 2020-21
Current Financial Year (FY) is 2019-20
ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]
Assessment year means the period of Twelve (12) months commencing on the 1st day of April every year. It is the year (just after the previous year) in which income earned in the previous year is charged to tax. E.g., A.Y.2019-20 is a year,which commences on April 1, 2019 and ends on March 31, 2020. Income of an assessee earned in the previous year 2018-2019 is assessed in the A.Y. 2019-20.
Assessment year means the period of Twelve months (12) commencing on the 1st day of April every year
- Duration: 12 Months Period – Period of Twelve months starting from 1st April.
- Relation with Previous Year: An Assessment Year falls immediately after the Previous Year.
- Purpose: Income of a previous year is assessed and taxable in the immediately following Assessment Year.
PREVIOUS YEAR [SEC.3]
Previous Year means the financial year (FY) immediately preceding the Assessment Year (AY). Income earned in a year is assessed in the next year. The year in which income is earned is known as Previous Year (PY) and the next year in which income is assessed is known as Assessment Year (AY). It is mandatory for all assessee to follow financial year (from 1st April to 31st March) as previous year for Income-Tax purpose.
Previous Year means the Financial Year (FY) immediately preceding the Assessment Year (AY).
Financial Year (F.Y)
According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year (FY) means the year commencing on the 1st day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st March of the next year. It plays a dual role i.e. Assessment Year as well as Previous Year.
Financial Year means the year commencing on the 1st day of April.
Example: Financial year 2019-20 is –
- AY for the Previous Year 2018-19; and
- Previous Year for the Assessment Year 2020-21.
Determination of the first previous year in case of a newly set-up business or profession or for a new source of income
|In case of||Previous year is the period|
|Business or profession being newly set-up||Beginning with the date of setting up of the business & ending on 31st March of that financial year|
|A source of income newly coming into existence||Beginning with the date on which the new source of income comes into existence & ending on 31st March of that financial year.|
- Above explanation signifies that the first previous year may be a period of less than 12 months but in any case it cannot exceed a period of 12 months. However, next and subsequent previous years shall always be a period of 12 months.
Where an assessee has an existing regular income from various sources and he earns an income from a new source during the financial year, his previous year shall commence –
- For the existing income: From 1st April of previous year; and
- For new income: From the date when on which the new source of income comes into existence.
However, assessee is liable to tax on aggregate income from all the sources, therefore, all the income will be included in the previous year.
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Exceptions to the general rule that income of a Previous Year is taxed in its AY
This is the general rule that income of the previous year of an assessee is charged to tax in the immediately following assessment year. However, in the following cases, income of the previous year is assessed in the same year in order to ensure smooth collection of income tax from the taxpayer who may not be traceable, if assessment is postponed till the commencement of the AY:
- Sec.172 : Income of a non-resident assessee from shipping business
- Sec. 174 : Income of a person who is leaving India either permanently or for a long period
- Sec. 174A : Income of bodies, formed for a short duration
- Sec. 175 : Income of a person who is likely to transfer property to avoid tax
- Sec. 176 : Income of a discontinued business.In this case, the Assessing Officer has the discretionary power i.e. he/she may assess the income in the same previous year or may wait till the Assessment year.