Know more about LTA or LTC Claims

Most of us do take out time for at least one vacation in a year with our family. While this is good, so many times we just fail to take the tax benefits provided to us by the government. There can be various reasons for not availing tax benefits like these. Either we are afraid of the paper work, or we are too busy otherwise, or we do not realize the importance of saving taxes or it may be just that we are not fully aware of the rules pertaining to Leave Travel Concession (LTC)/Leave Travel Assistance (LTA)

Difference between Financial Year and Assessment Year

 

Sometimes, things as simple as the difference between the Financial Year (FY) and an Assessment Year(AY) can give you the right perspective to look at things.

We studied in detail about the Financial Year / Fiscal Year, its origin and relevance in different countries and continents across the globe in one of our earlier post this month ( What is Financial or Fiscal Year ). Today, let us try and understand how this Financial Year is different from an Assessment Year.

Let us just summarize what we understood about Financial Year or Fiscal Year:

A Fiscal Year (or a Financial Year or Accounting Reference Date) is a 12-month period used for calculating annual ("yearly") financial reports in businesses and other organizations. In many jurisdictions, regulatory laws regarding accounting require such reports once per twelve months, but do not require that the twelve months constitute a calendar year (i.e. January to December).

The income earned in a year is always assessed and taxed in the next year. The year in which income is earned is called Financial Year and the year in which it is assessed and taxed is called Assessment Year.

As an example, the income of Financial Year 2011-12 will be assessed for the taxes to be paid and will be taxed in Assessment Year 2012-13.

So, the whole concept is to earn income in a particular year and pay tax on it and file your return the next year . Also remember that all tax laws are framed for Assessment Year and not for Financial Year i.e. reference to any year in Tax laws will means reference to Assessment Year. Presently, we are in Financial Year 2012-13 and Assessment Year 2013-14. This means that we are earning income in the year 2012-13 and we will be paying taxes on this income in the Assessment Year 2013-14.

Some of you who work as employees might get confused with what i just said. Hold on, there are exceptions to the above rule, and your salary income happens to be one of the exceptions. In general, the above rules apply to all incomes except certain specific cases like Tax Deduction at Source (TDS) and some businesses paying Advance Tax. In these exceptional cases, you pay tax in the same year as the financial year i.e. the year in which you earned the money.

However, even in these cases, remember that the Income Tax returns are filed in the Assessment Year only. So, if you have a source of income other than your salary (salary gets tax deducted at source) like bank FD interests, capital gains through stocks, mutual funds and property etc, then in all such cases, you would be declaring this income only in the Assessment Year and also paying taxes in the Assessment Year only.

In nutshell, an Assessment Year allows you some freedom of time to assess your correct tax liability to be paid to the government for the money that you earned in the Financial Year.

As you approach towards Financial Freedom, your portfolio would mostly consist of income which is passive in nature i.e. it does not come by working actively for your salary every year. Your nest egg would be giving you most of the returns. Most of the income for a financially free person comes from interests and capital gains, and hence, the tax is mostly paid in the Assessment Year. :)

Cheers

Manoj Arora

Related Post Titles:

Financial Freedom 

Financial Year

Income Tax 

Manage Money

 

 

 

What is a Financial Year or Fiscal Year

 

What is Financial Year

This is also termed as a Fiscal year in many countries. This is typically used for calculating annual ("yearly") financial statements in businesses and other organizations. Fiscal years vary between businesses and countries. The "fiscal year" may also refer to the year used for income tax reporting.

Does it vary across countries

Yes, it does vary across the world. There is no globally consistent mechanism for a Financial Year. Here are some glaring examples

In India, the government's financial year runs from 1 April to 31 March (Example 1 April 2012 to 31 March 2013 for the current financial year (2012–2013).

The U.S. government's fiscal year begins on 1 October of the previous calendar year and ends on 30 September of the year with which it is numbered. For example, the United States government fiscal year for 2013 ("FY 2013" or "FY13") is from 1st October 2012 to 30th September 2012

The Australian government's financial year is 1 July – 30 June. The year ending on 30 June 2011 is referred to as "financial year 2010–11" or sometimes just "financial year 2011". This applies for personal income tax and the federal budget, and is the standard for all financial entities in the country.

In China, the fiscal year for all entities starts on 1 January and ends 31 December, consistent with the calendar year.

In the Arab Republic of Egypt, the fiscal year starts on 1 July and concludes on 30 June.

Why Financial Year has to be different from a Calendar Year

Every country has some logic for start and end months for the fiscal year. This logic is primarily based on some historical and cultural reasons and has continued till date.

e.g. These are the reasons why financial year starts in April in India.

1. India was ruled by British for around 150 years, who followed the accounting period of April to March after the adoption of Gregorian calendar system of accounting.

2. Harvesting season starts in April. Being an agricultural country, money starts flowing into the hands of agriculturists and related marketeers only in April. During the British rule, since most of the Britisher's taxes were from the crops, the ruling government prepared its annual budget keeping these crop patterns in mind.

3. Almost in all parts of India, regional new year falls around 13th or 14th April. That is why the Govt. fixed 1st of April as new financial year.

4. One of the other reasons why fiscal year start and end differs from the calendar year start and end (ie Jan to Dec) is also to avoid "year end activities" like X-mas, New Year celebrations etc and financial accounting activities to clash at the same time.

In the next post, i would try to distinguish the Financial Year with the Assessment and Calendar Year.

Happy reading

Manoj Arora