What is an assessment year?

An assessment year is the period during which your prior year's income is assessed for ITR filing reasons. An assessment year begins on April 1 and concludes on March 31 of the following year.

Many taxpayers confuse between the Financial Year (FY) and Assessment Year (AY). They often tend to treat them as the same, which leads to making mistakes when they file their income tax returns.

What is Financial Year?

A Financial Year (FY) is the period between 1 April and 31 March – the accounting year in which you earn an income.

What is Assessment Year?

The assessment year (AY) is the year that comes after the FY. This is the time in which the income earned during FY is assessed and taxed. Both FY and AY start on 1 April and end on 31 March. For instance, for FY 2020-21, the assessment year is AY 2021-22.

Difference between AY and FY:

From an income tax perspective, FY is the year in which you earn an income. AY is the year following the financial year in which you have to evaluate the previous year’s income and pay taxes on it.

For instance, if your financial year is from 1 April 2020 to 31 March 2021, then it is known as FY 2020-21. The assessment year for the money earned during this period would begin after the financial year ends – that is from 1 April 2021 to 31 March 2022. Hence, the assessment year would be AY 2022-22.

Why does an ITR form have AY:

Since income for any particular financial year is evaluated and taxed in the assessment year, income tax return forms have assessment year (AY). As the income earned in a financial year cannot be taxed before it is earned, so it is taxed in the following year.

Scenarios like loss of job, job change, new investments etc. can come up in the middle or end of the FY. Also, the income earned in a financial year cannot be exactly known before the end of the financial year. This is why the assessment can start only after the financial year ends. Hence, taxpayers have to select AY while filing their income tax returns.

What are called as block of assets?

Section 2 (11) "block of assets" means a group of assets falling within a class of assets comprising-

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed

What is "Previous year"?

Section 3 of the Income Tax Act states that:

For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year.

Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be. The date on which the source of income newly comes into existence and ending with the said financial year.

Cost to the Previous Owner?

Section 49: Cost with reference to certain modes of acquisition:

1) Where the capital asset became the property of the assessee.

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;

(i) under a gift or will;

(ii) (a) by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or

(d) under a transfer to a revocable or an irrevocable trust,

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation.-In this sub-section the expression "previous owner of the property" in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (l) or Clause (il) or clause (iv) of this sub-section.

What is short-term capital asset?

Section 2 (42A) "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: [or an immovable property, being land or building or both,] the provisions of this clause shall have effect as on 01.04.2017, if for the words "thirty-six months", the words "twenty-four months" had been substituted.]

Explanation 1. -(i) In determining the period for which any capital asset is held by the assessee.

(b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section

What is long-term capital asset?

"Long -term capital asset" means a capital asset held by an assessee for more than thirty-six months immediately preceding the date of its transfer: for an immovable property, being land or building or both,] the provisions of this clause shall have effect as on 01.04.2017, if for the words "thirty-six months", the words "twenty-four months" had been substituted.] Explanation 1. (i) In determining the period for which any capital asset is held by the assessee-

Reasons for the bifurcation of capital gains into long-term and short-term gains:

The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long- term. Hence, to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different.

Computation of capital gain depends upon the nature of the capital asset transferred during the previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset. Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital gain.

The three methods of calculating a capital gain: There are three methods that are used to calculate a capital gain:

the 'other' method.
the indexation method.
the discount method.