What is a Financial Year?

What is a Financial Year (FY)?

A Financial Year (FY) is the 12-month period used for recording income, expenses, and tax calculations. In India, the financial year starts on April 1st and ends on March 31st of the following year.

For example, the financial year 2024-25 will begin on April 1, 2024, and end on March 31, 2025.

The financial year is crucial for:

• Tax Filing: It determines the period for which individuals and businesses need to report their income.
• Accounting & Auditing: Companies prepare balance sheets, profit & loss statements, and financial reports based on the financial year.
• Budget Planning: Governments and organizations set financial goals and allocate budgets according to the financial year.
   

Financial Year vs. Assessment Year (AY)

The terms Financial Year (FY) and Assessment Year (AY) are often confused. Here’s the difference:

Key Point: Taxpayers file income tax returns for a financial year in the corresponding assessment year.

For instance, if you earned income in FY 2023-24 (April 1, 2023 - March 31, 2024), you will file your Income Tax Return (ITR) in AY 2024-25 (April 1, 2024 - March 31, 2025).
 

Why is Financial Year Important for Indian Taxpayers?

The financial year impacts taxpayers in multiple ways:

1. Income Tax Calculation
Income earned in a financial year is taxed in the following assessment year. Taxpayers must calculate taxable income, claim deductions, and pay taxes accordingly.

2. ITR Filing
The Income Tax Return (ITR) for a financial year must be filed in the corresponding assessment year before the due date (usually July 31 for individuals and October 31 for businesses).

3. Advance Tax Payments
If your total tax liability exceeds ₹10,000, you must pay advance tax in installments during the financial year to avoid penalties.

4. Tax Planning & Investments
Many tax-saving investments like PPF, ELSS, and tax-saving FDs must be made within the financial year to avail deductions under Section 80C.

5. Business Financial Reporting
Companies must prepare profit and loss statements, balance sheets, and financial reports for the financial year, which are used for auditing, tax filing, and investor relations.
 

Tax Filing Deadlines Based on Financial Year

For Individuals & Salaried Employees

• The financial year ends on March 31, and individuals must file their ITR by July 31 of the assessment year.
• Example: For FY 2024-25, the ITR filing deadline is July 31, 2025 (unless extended by the government).

For Businesses & Corporates

• Companies and businesses requiring auditing must file their returns by October 31 of the assessment year.
• If they have international transactions, the deadline is November 30.

For Tax Deducted at Source (TDS) Payments

• TDS returns must be filed quarterly based on the financial year.

Common Terms Related to Financial Year

1. Previous Year
The previous year refers to the financial year in which income was earned. For tax purposes, it is the same as the financial year.
Example: FY 2023-24 is also the previous year for AY 2024-25.

2. Tax Deducted at Source (TDS)
Employers deduct TDS on salaries based on the financial year and issue Form 16 for tax filing.

3. Advance Tax
Self-employed individuals and businesses pay advance tax in installments during the financial year to avoid interest charges.

4. GST Filing
Businesses must file GST returns (GSTR-1, GSTR-3B, etc.) monthly or quarterly based on their financial year turnover.

How is Financial Year Used in Other Countries?

The financial year varies across different countries:

India follows the April - March financial year, while other countries may have different start and end dates.

Impact of Financial Year on Investments & Deductions

1. Section 80C Tax Deductions

• Investments in PPF, NSC, ELSS, Life Insurance, EPF, etc. must be made before March 31 to claim deductions in the current financial year.

2. Capital Gains Tax

• Any capital gains from property or stocks are taxed in the financial year in which they are sold.
• Capital gain exemptions (e.g., under Section 54 for property sale) must be reinvested before March 31 to claim benefits.

3. Home Loan & Interest Deductions

• Home loan principal and interest deductions under Section 80C and 24(b) apply to the financial year in which they are paid.

Conclusion

The financial year is the foundation of India’s tax system, defining the period for income tax filing, tax deductions, GST compliance, and financial reporting. Understanding its role helps individuals and businesses plan their taxes, avoid penalties, and make informed financial decisions.

For taxpayers, staying aware of financial year deadlines, tax filing rules, and investment timelines is crucial for seamless compliance and tax savings