KNOWLEDGE CENTRE Tax Planning / What is the Difference between AY and FY in an ITR Form and How to Declare Income from ELSS Investments

What is the Difference between AY and FY in an ITR Form and How to Declare Income from ELSS Investments

What is the difference between AY and FY?

While paying tax one is often confused about the time period during which the tax on income needs to be paid. This is where the concept of Assessment Year and Financial Year emerges. Let us understand both these concepts well.

What is AY and FY in ITR?

For the purpose of income tax, financial year (FY) is the period between April 1 and March 31 when you earn your salaries and income. The FY is followed by the assessment year (AY) when the income earned is assessed and taxed.

Both AY and FY begin on April 1 and end on March 31. For example, the current FY is 2017 – 18 and the AY for it is 2018 – 19.

What is does ‘previous year’ mean in taxation?

Another term you may come across when you discuss taxation is the previous year. As already mentioned, the assessment year is when your income is assessed and taxed. This evaluation and tax assessment are done on your income generated during the previous year, which is also known as the financial year.

Why is AY included on Income Tax Return (ITR)

The income for a certain financial year is evaluated and taxed in the assessment year. Therefore, the ITR includes a column to report the AY. The reason is that the income is earned during a specific financial year. However, it cannot be evaluated and taxed until the end of the year when you have actually earned the income. Therefore, you need to choose the right assessment year when you file your returns.

How can I report income from investments?

Section 80C of the Income Tax (IT) Act, 1961 allows you to invest in various financial instruments to save tax. Some of these include life insurance, national pension system (NPS), tax-saving fixed deposits (FDs), public provident fund (PPF), and equity-linked saving schemes (ELSS).

One major concern when you invest in one or more of the aforementioned options is the tax impact on your investments and its reporting. Your concern may increase when there is no specific space in the ITR form to disclose the relevant details. However, there is no reason to worry if you follow the right procedure to avoid confusion.

Here is how you must complete the procedure to report your income from mutual fund investments.

  • At the time of investing
    When you invest money in mutual funds, it does not immediately affect your taxes. However, if the investment is in tax-saving schemes like ELSS, you will need to claim a deduction under section 80C. Therefore, unless you want to claim a deduction, there is no need to disclose your investments in mutual funds. Regular investments where the amount is not directly based on your total income holds no interest to the Income Tax department. However, if there is any income earned on your investments, you will need to report them.
  • Deductions
    In addition to ELSS, pension funds offered by asset management companies (AMCs) help to save tax. An amount of up to INR 1.5 lakh in these instruments is exempt from tax under section 80C of the IT Act. The ITR does not provide specific space to disclose such deductible investments. You must report these under the total eligible deductions under section 80C in the ITR form.
  • Dividend earnings
    Mutual fund schemes may provide income through dividends. These are tax-free for you. Nonetheless, you must report these under the tax-free section in the ITR form.
  • Capital gains
    You may also earn returns on your investments in the form of capital gains, which is the appreciation of your initial principal amount. During the FY, you may exit your investments, thereby earning capital gains. Such gains are taxed based on the kind of fund you were invested in—a debt fund, an equity fund, or a balanced fund.

If you exit a debt fund before three years, the gains are short-term and taxed as per your tax slab. Long-term gains on them when you exit after three years are taxable at 20% after indexation.

Short-term for equity funds and balanced funds is less than 12 months and gains thereof are taxed at 15%. However, if you exit either of these funds after 12 months, the gains are long-term and tax-free. Capital gains are reported under the same heading in the ITR form.

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