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Financial year is a fundamental concept for anybody interested in finance and its related aspects. In fact, the relevance of this concept is not just for finance enthusiasts but for all those individuals earning money and paying taxes. The financial year signifies when all accounting activities begin and end for various institutions, including the government, corporations and individuals.
Understanding the financial year and its relevance in finance is essential for all financial activities like accounting, tax payments and planning, auditing, etc. Today’s article discusses the meaning of the financial year and how it is used in different aspects of finance.
What is a financial year?
A financial year is a period that the government uses for accounting. Corporations also use the same period or financial year to finalise their books of accounts and financial statements.
The financial year is also called the fiscal year since the fiscal policies of a nation rely on this period. So, tax calculations and payments rely on the financial year, too.
Some people refer to it as the budget year because the government’s new budget applies from the start of the financial year. A new budget is released every year for the following financial year’s activities.
Financial year in India
The financial year varies from one country to another. In India, the financial year starts from April 01st. It ends on March 31st of the following year. India follows a 12-month period as the financial year.
Some countries like France, Germany, Belgium, Brazil and others use the regular calendar year as their financial year, too.
One of them is its connection to the weather conditions in India. Agriculture is an important industry in every economy. Post-independence, India was an agricultural-dominant country. Despite the growth of different sectors today, agriculture continues to be a strong force driving India’s economy. The April to March cycle syncs with India’s crop season. While sowing crops begin during April, they are ready for harvest by March of the following year. Hence, the government decided to follow a similar cycle for convenient planning of agricultural activity.
Also, the government announces the budget on 1st February, after the beginning of the calendar year. It may be difficult for businesses to change their financial plans post the announcement of the budget. The financial year beginning on 01st April gives sufficient time for businesses to plan their upcoming year.
Relevance of financial year
- The government forms its plans and policies, keeping the fiscal year in mind. New policies are formed at the beginning of every fiscal year. The budget, too, is applicable from the 01st of April, every year.
- Indian companies prepare their financial statements and close their books of accounts on March 31st every year. They announce their yearly results to the public on the same day.
- Tax payments by individuals, corporations and all other entities happen as per the financial year.
Financial year vs assessment year
The assessment year is purely a concept used for filing taxes. It is also a period of 12 months following the financial year. The assessment year is when taxes are filed for the incomes earned during the previous financial year.
For example, 01 April 2024 to 31 March 2025 is the assessment year for the financial year 2023-24.
Bottomline
Understanding India’s financial year is essential for all citizens as it is a significant aspect of recording incomes and filing taxes. Keeping a tab on the financial year and the relevant dates is important to ensure no deadlines are missed, since missing such dates can lead to fines and penalties.
FAQs
Financial years are represented as FY, followed by the years involved. For example, the financial year from 01st April 2024 to 31st March 2025 is represented as FY 2024-25. The following year will be FY 2025-26.
The calendar year follows the Gregorian Calendar, which starts on the 01st of January and ends on 31st December every year. Countries alter their financial years based on their requirements. India follows a different period to stay in line with the country’s traditions and activities.
The financial year is a significant period as the government’s income, expenses, policies, etc., rely on this period. It is also essential as it helps entities in measuring their incomes and taxes accurately.
The financial year in the United States of America starts on 01 October and ends on 30 September of the following year.
Most companies follow the same financial year that the government follows. However, companies can change their financial years and have a different year-end if the business requires it. The financial year is more for convenience than compulsion. Irrespective, companies must follow the dates and deadlines given by the government.