Financial Year (FY), Assessment Year (AY) and Previous Year (PY) are terms very commonly heard during the Income Tax (IT) returns filing season. This article defines these terms, and explains the difference between them.

Please click here to know the New Income Tax Slabs / Brackets for FY 08-09, and an analysis of its positive impact on your tax liability

And when we start filling out the tax return form, one of the first things that we encounter is the field Assessment Year (AY). And next in line is Previous Year (PY). So, what is an Assessment Year? What is a Previous Year? And, how are these different from a Financial Year (FY)?

It's time to understand this better!

(Ready to file your income tax return, but confused which form to use? Please read "Income Tax (IT) Return Filing – Which ITR form to use?")

Unit of Time for Measuring Income, Expenses and Investments

The government charges income tax on the income we earn. From this income, it also allows us to deduct some expenses we incur, and some investments that we make.

But for measuring the income, expenses and investments, we need a unit of time. This unit has been defined world over as 1 year. Thus, almost everywhere in the world, companies and people report their incomes, expenses, investments and other relevant information on a yearly basis.

Financial Year (FY)

The financial information is reported on a yearly basis, and the year for which this information is reported is called a Financial Year, or FY in short.

The actual start and end of a financial year varies from country to country.

For example, the financial year in India starts on 1st April every year, and ends on 31st March of the following year. Thus, the last financial year in India (for which companies would soon start reporting their incomes) started on 1st April 2007, and ended on 31st March 2008. This is usually denoted as FY 07-08, or FY 08.

In USA, the financial year coincides with the Calendar Year (January to December). Thus, it starts on 1st January every year, and ends on 31st December of the same year. The current financial year in USA started on 1st January 2008, and would end on 31st December 2008. This is usually denoted as FY 08.

The term Financial Year, or FY, is used universally. That is, it is used not just in the context of income tax, but also for all other accounting and reporting.

Assessment Year (AY)

Income from a particular financial year is assessed for income tax in the following year. The financial year in which this assessment takes place is called the Assessment Year (AY).

Thus, for the current tax season, we would be filing the income tax returns for the Financial Year 07-08 (or FY 07-08), and since it would be assessed in the year 2008-2009, the Assessment Year is 08-09 (or, AY 08-09).

The term "Assessment Year" is normally used specifically for Income Tax (IT).

Previous Year (PY)

Now after reading about FY and AY, this should be simple!

In an assessment year, the income from the year preceding it is assessed for income tax. This year is called the Previous Year, or PY in short. So, simply speaking, Previous Year is the financial year for which your income is being assessed. Now that's simple, isn't it?

Let's continue with our example: For the current tax season, we would be filing the income tax returns for the Financial Year 07-08 (or FY 07-08), and therefore, it is also the Previous Year (PY 07-08). Since this income would be assessed in the year 2008-2009, the Assessment Year is 08-09 (or, AY 08-09).

Again, the term "Previous Year" is also normally used specifically for Income Tax (IT).

Now that we understand the terms Financial Year (FY), Assessment Year (AY) and Previous Year (PY) better, I have only one thing to say:

Happy Filing!!

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