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Decoding India's Fiscal Calendar: Why Financial Year Start from 1st April?

Updated: Dec 13, 2023

India, a country of diverse cultures and traditions, has many things that set it apart from the rest of the world.

 

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One of these unique features is its fiscal calendar, which runs from April to March. But have you ever wondered why India follows this financial year cycle? Let's explore the fascinating history behind India's fiscal calendar.


The Julian Calendar and the May-April Fiscal Year

India's fiscal calendar dates back to colonial times, when the British East India Company was ruling the country. The Company's financial year ran from May to April, which was more convenient for the Company's accounting purposes. However, after India gained independence in 1947, the new government had to decide on a fiscal year that would suit the country's needs.


Considering Options: Calendar vs Financial Year

The Indian government considered different options, including the calendar year (January to December) and the financial year used by the British East India Company (May to April). However, after much deliberation, the government decided to adopt a fiscal year that would coincide with the agricultural cycle of the country.


The Agricultural Cycle and the April-March Fiscal Year: Why financial year starts from 1st April

India's economy is predominantly based on agriculture, and the majority of the country's population is involved in farming. The months of April to March correspond to the crop cycle of India. The sowing of crops begins in April, and the harvest takes place between October and March. Therefore, the fiscal year from April to March allows the government to align its budget with the country's agricultural cycle.


The Julian Calendar and the Missing Days

However, the story of India's fiscal calendar is more complex than just the agricultural cycle. In 1752, the British East India Company introduced the Gregorian calendar, which replaced the Julian calendar that had been in use until then.


The Julian calendar had an error in its leap year calculation, which caused it to slowly drift out of sync with the solar year. By the time the Gregorian calendar was introduced, there was a difference of 11 days between the Julian calendar and the actual solar year.


To align the calendar with the solar year, the Gregorian calendar dropped 11 days and changed the leap year rule to a more accurate one. When the British East India Company introduced the Gregorian calendar in India, they also dropped 11 days to align with the new calendar. However, the Indian fiscal year remained unchanged, running from May to April.


This meant that the financial year that ended in March 1752 was only 21 months long, as it included the missing 11 days. The next financial year, which started in April 1752, was a normal 12-month year.


Consistency and Comparability of Data

Despite this hiccup, the adoption of April to March fiscal year allowed the government to maintain consistency and comparability of data over time. With the same financial year cycle being followed every year, it becomes easier to compare the data and track the progress of the economy.


Integral to India's Financial System

India's fiscal year cycle has become an integral part of the country's financial system, and it affects almost every aspect of the economy. From government budgets to corporate financial reporting, the fiscal year plays a crucial role in shaping the economic landscape of the country.


As India continues to evolve and grow, its fiscal calendar will remain a crucial aspect of its financial system. While there may be debates on whether to change the fiscal year to align with the calendar year or to adopt a different cycle altogether, the fact remains that April to March has served India well for over seven decades.


Understanding the history and significance of India's fiscal calendar is important not only for those in the finance industry but for every citizen of the country. By recognizing the role that the fiscal year plays in shaping the economy, we can work together toward a better future for India.


What is the Difference Between AY and FY?

In the context of income tax, the Fiscal Year (FY) is the year during which you earn your income. On the other hand, the Assessment Year (AY) is the subsequent year in which you assess the income earned during the previous financial year and fulfill your tax obligations.


For example, if your financial year spans from April 1, 2020, to /3/ 31, 2021, it is denoted as FY 2020-21. The assessment year for income earned in this period commences after the conclusion of the financial year, running from April 1, 2021, to /3/ 31, 2022. Consequently, this assessment year is identified as AY 2022-23.


Chart for FY and AY for Recent Years

Period

Financial Year

Assessment Year

1/4/2021 to 31/3/2022

2021-22

2022-23

1 /4/ 2020 to 31 /3/ 2021

2020-21

2021-22

1 /4/ 2019 to 31 /3/ 2020

2019-20

2020-21

1 /4/ 2018 to 31 /3/ 2019

2018-19

2019-20

1 /4/ 2017 to 31 /3/ 2018

2017-18

2018-19

1 /4/ 2016 to 31 /3/ 2017

2016-17

2017-18



Why Does an ITR Form Have AY?

Income tax return forms incorporate the Assessment Year (AY) as an essential component because income earned in a given financial year cannot be taxed until it is actually earned. Therefore, taxation occurs in the year following the income generation.


Situations such as job changes, investments, or financial changes may transpire during the course of the financial year, making it challenging to determine the exact income before the year's end. Consequently, the assessment process can only commence after the financial year concludes. Thus, taxpayers must specify the AY when they file their income tax returns.


FAQ

Q1: What is the importance of commencing the Indian financial year in April?

A1: The commencement of the Indian financial year in April has significance due to its alignment with the agricultural and economic cycles inside the country. Commencing in April allows for including the Rabi and Kharif crop seasons within the financial year, hence facilitating agricultural and economic planning.


Q2: Can the Indian financial year be considered identical with the fiscal year or tax year?

Indeed, the Indian financial year is often referred to as the fiscal year and the tax year. The designated time period under consideration extends from April 1 to March 31, serving as a framework for financial, accounting, and tax-related activities.


Q3: What is the correlation between the Indian financial year and the financial calendar and accounting year?

A3: The Indian fiscal year functions as the fundamental framework for the financial calendar and accounting period. Financial planning and tracking aids organisations and people in effectively managing their financial operations, hence promoting adherence to financial reporting standards and maintaining consistency.


Q4: Is there any historical importance associated with the Indian financial year?

A4: The historical importance of the Indian financial year may be traced back to its origins during the British colonial era. The establishment of accounting and financial practises in India was influenced by the British system, and these practises have been maintained in the post-colonial era.


Q5: What is the correlation between the Indian fiscal year and the budgetary year?

The Indian fiscal year has significant importance in the context of government budgetary planning. The Union Budget is traditionally unveiled in the month of February, providing a comprehensive overview of the budgetary allocations for the next fiscal year, which starts in the month of April. This practice guarantees the achievement of efficient planning and optimal allocation of resources.


Q6: What is the influence of the Indian financial year on financial planning and reporting for enterprises and individuals?

The Indian fiscal year has significant importance in the realms of financial planning, tax computations, and financial reporting. The designated time period is used by both businesses and people for the purpose of establishing financial objectives, documenting revenue and expenditures, and fulfilling tax responsibilities, hence assuring financial stability and adherence to legal mandates.



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