Assessment Year (AY), Financial Year (FY), and Previous Year (PY) are the terms which we have heard a lot specially during the day when Income Tax Return is to be filed. People from non-finance background find it difficult to understand these terms. But this post will be helpful for them.
Before going directly to these terms, let us first understand what is year and calender year.
What is year?
An year is a continuous period of twelve months.
What is calender year?
Calender year is an year starting from 1st Jan and ending on 31st Dec. In other words, it is a continuous period of twelve months starting from 1st Jan and ending on 31st Dec.
Now we can move our technical terms
Financial Year
Financial year (FY) is an year starting from 1st April and ending on 31st March. In other words, it is a continuous period of twelve months starting 1st April and ending on 31st March.
Assessment Year
Assessment Year (AY) is defined in section 2 (9) of Income Tax Act, 1961 as a year in which income of an assessee of the previous year needed to be assessed. Assessment Year (AY) is a period of twelve months starting from 1st April and ending on 31st March.
Previous Year
Previous Year (PY) as per section 3 of Income Tax Act, 1961 is a year in which income is earned. This income is taxed in the next year which is called assessment year. Previous Year (PY) is also a period of twelve months starting from 1st April and ending on 31st March.
Theoretically, AY and PY both are financial year. But, in practical life, PY is used as synonymous to financial year.
Now, let us understand with the help of example.
Suppose you have earned income (salary or any other) from 1st April 2014 to 31st March 2015. In this case:
- Previous year is from 1st Apr-14 to 31st Mar-15. This is the period in which income is earned. Short form used here for year is ”PY 2014-15”.
- Assessment year is from 1st Apr-15 to 31st Mar-15. This is the period in which income is assessed/ taxed related to previous year. Short form used here for year is ”AY 2015-16”.
- Financial year, as practically used, is from 1st Apr-14 to 31st Mar-15. Short form used here for year is ”FY 2014-15”.
I hope that above has cleared your concepts.