Financial year – Meaning, Impact and Importance

Understanding the creation of a Financial Year

The financial year in India is a period of one year where companies and businesses are mandated to compile their income balance sheets and prepare a record of the same. The Ministry of Finance is the regulatory body of these reports and businesses must submit these reports at the end of the year to the MoF.

In India, the financial year begins on the 1st of April and ends on the 31st of March the following year. This is not the case for other countries around the world. A financial year is decided by the finance ministries of different countries. They take into account the different types of businesses operating within their borders and holistically arrive on a 12-month period of accounting. The United States government, for example, tracks their financial year from the 1st of October to the 30th of September of the following year. China, on the other hand, keeps their financial year in line to the calendar year, beginning on the 1st of January and ending on the 31st of December.

The discrepancy in the dates for the tracking of the financial year can be seen within the countries too. For example, tech companies in the United States might end their financial year at the end of June. This is because of the fact that different companies have different cycles of sales. Technological companies might have heavier sales volumes in the starting quarters of the calendar year, and thus, may want to end their financial year earlier. Retail stores like Walmart may choose to end their financial year in January itself. This is because most of their sales happen in the holiday season, which ends soon after the new year.

All in all, companies might have different financial year cycles based on their seasons of sale. This change allows them to better represent themselves financially and gives a more accurate picture of their income.

Difference between a Financial Year and an Assessment Year

Financial year analysis is extremely crucial for the tracking of taxes paid by companies and organisations. It is the summation of all the income generated by these businesses. However, this is only the first step in the process of filing taxes. Where the financial year is the period for showing the income generated, the actual filing of the tax returns is done in the period of the assessment year.

Assessment year or A.Y. is different from the financial year. During this period, companies and organisations are required to file their taxes based on the analysis of their financial year. The assessment year is assessed as the year right after the financial year. This means that income generated in the financial year, gets taxed in the assessment year, which comes the following year.

All in all, from a tax perspective, the financial year or F.Y., which may also be referred to as the fiscal year, is the period of 12 months where organisations plan and assess their income generated. Whereas, the assessment year, or A.Y., is the period following the financial year, where all the income generated is put up for assessment and taxed accordingly.

Suppose you run your own business. You begin to track your finances and compile them to form your Financial year report. Thus, your F.Y. will start from the 1st of April 2020, and end on the 31st of March, 2021. Upon completion, you will submit your reports to the finance ministry and then from the 1st of April, 2021 to the 31st of March, 2022, you will be assessed on your filed income. Thus, your taxable income for the F.Y. 2020-21 will be assessed in the A.Y. 2021-22.

How to get ready for the financial year

People often get overwhelmed by the intricacies of a financial year. Gathering information about your different income sources, especially if you are a big business is extremely tough. Coupled with understanding the deductions you are eligible for, or the changes in the tax code, no wonder many people falter on completing their tax filings.

This information must be taught to children in their school years, to make them financially literate and independent. However, till that happens, we will provide a basic overview of the few steps you must complete in order to have a hassle-free financial year.

  1. Start your planning

Not everyone is a financial wizard. Yet, most people wait till the end of the filing period to sort out their finances and plan their taxes. This is the incorrect way to file your taxes. Individuals, businesses and organisations must start planning their finances very early on in the financial year. Investments, deductions, Public Provident Fund expenses, Tax Deducted at Source cuts (TDS), all of these must be complied well in advance. Not only does this help ease your returns, but you will have ample time to understand the deductions you or your organisation is eligible for.

  1. Get the documents ready

Tax filing is excruciating because of the bureaucracy involved. There are several documents that are needed to complete both the financial as well as the assessment year. In order to not panic at the last moment, collection of these documents in advance is crucial. Thus, you need to be ready with the following documents:

  • Bank Statements
  • Mutual fund investment records
  • Public Provident Fund records
  • TDS Certificates
  • Bank Interest statements
  • PAN Card
  • GST number (for businesses and organisations)
  1. Identify the tax regime that best suits you

The Indian government had changed their tax code in their budget for the year 2020-21. Here, Finance and Corporate Affairs Minister Nirmala Sitharaman had announced a new tax regime. This divided individual income into slabs and where different slabs were taxed at a different percentage. When the finance ministry introduced this new tax regime, it gave the opportunity to people to decide over which tax code they choose to follow. While the new tax regime offers you lower tax rates, the old regime, with its higher tax rates, offers you the ability to take in many deductions on your taxable income. Thus, after an analysis of your financial needs, you must be clear over which of the tax regimes are best suited to your requirements.

Importance of the Financial Year

After reading through this piece, you must wonder what is the importance of assigning a financial year. As mentioned above too, a financial year is extremely crucial to the functioning of the government. It gives them an understanding of the total business done within their country in a period of 12 months. This data is then used to decide on the budget of the year. Without the creation of a financial year, the finance ministry will be unaware of the total income generated by individuals or businesses, which would render the tax collection process useless, cutting the government of their most important source of revenue.

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Wrapping Up

Financial planning and tracking is a tough task. Everytime, right before the tax filing day, people are running to their chartered accountants to balance their sheets. This can be easily fixed if you educate yourself in the functioning of the financial system. The first step in that is understanding what is a financial year.

The financial year is the year which measures the total income you, or your business, has generated. This is followed by the assessment year, where your income shown is taxed according to the different slabs set by the government. The financial year may be different across countries, or even companies. The overall understanding is, a financial year is a 12 months period where income sourced for different places is combined to create a total net income.

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