Introduction – What is the Tax Year
The first time we heard the word ‘year’ was probably when someone wished us a Happy New Year. Over a period of time, we came to know and understand such other phrases as a calendar year, leap year, academic year, etc. Later, as we grew older, these changed to financial year, assessment year, fiscal year, etc.
Of importance to us now is the understanding of the phrase ‘tax year’. A tax year is an annual accounting period (of 12 months) for which all our incomes and expenses are recorded and reported. Different countries have different tax years with different names. Most of the countries in the world use the calendar year as the tax year, while many others, like India, use the April-March period.
Tax Year in India
In India, there are two taxation related years: the ‘previous year’ and the ‘assessment year’. Assessment year is the 12 month period, starting from April 1 and ending on March 31 next year, following the previous year. The previous year (PY) is the period when income is earned and expenses are incurred while the assessment year (AY) is when these accounts are assessed for income tax. We are presently in AY 2021-22 for PY 2020-21. The term ‘previous year’ now has the same meaning as financial year. Prior to March 31, 1989, income taxpayers had the option to choose a previous year followed by the assessment year. A large number of businesses had their financial years starting from Diwali and ending prior to the next year’s Diwali. Today, it is invariably from April 1 to March 31 next year. This change from April 1, 1989, was brought about to align the tax year with the fiscal year of the Government of India, which has been traditionally from April 1 to March 31.
There are, however, some circumstances where the previous year can be less than 12 months and taxes are paid in the same previous year. These are:
- when a person is leaving India on a long term basis
- any association of persons, the body of individuals, etc. formed for a limited period
- persons who are likely to transfer their assets to avoid tax
- in cases of discontinued businesses
In addition, ships owned by shipping companies run by non-residents without any representative(s) in India, will be allowed to leave port only on payment of taxes on their income, unless suitable arrangements for payment of taxes are in place.
The Companies Act 2013 also enjoins companies to have a uniform financial year of 12 months, ending with March 31 of every year. In the case of companies setting up business after 1 January, the financial year can be up to 15 months. If the company is incorporated outside India, the financial year can be up to a maximum of 18 months, with prior approval of the Central Government.
Tax Due Dates in India
Tax on income earned is required to be paid in advance – Advance Tax – during the financial year in four tranches. Balance of tax, if any, on self-assessment is to be paid along with the filing of return in the assessment year. The due dates for payment of advance tax are June 15, September 15, December 15 and March 15. You are expected to pay 100% of the advance tax by March 15. Else, you will be charged interest for delayed payment if the advance tax paid is less than 90% of the required tax. The last date for filing returns for individuals is July 31. After this date, even if an extension for filing is given, you will have to pay interest on the tax due, if in excess of Rs.1 lakh tax.
Employers in India and others making payments like salary, interest, dividends, etc., are required to deduct tax at source (which is called tax withholding in the US) and remit it to the Government. In addition, certain purchases made by individuals above a cut-off price, like luxury cars, flats, etc., attract a tax collection at the source. These can be reckoned towards advance tax paid.
Unlike the US, Indian states do not have the right to independently collect income tax. The Central Government in India collects income tax and shares it along with other central taxes with the states. The percentage of taxes devolving on states is determined by the Finance Commission. States, however, can collect certain taxes like property tax, etc.
Tax Year in the US
The United States is one of the very few countries which have a fiscal year starting October 1 and ending with September 30. However, the tax year is the calendar year for individuals. As an individual, you can choose to change your tax year with the prior permission of the IRS. Corporates can choose between a calendar year (January 1 to December 31) and a fiscal year. A fiscal year is either a 12 consecutive month period, which does not end on the last day of December or is a 52/53 weeks-long consecutive period that does not have to end on the last day of a month. Examples: Cisco’s fiscal year ends on July 31; Apple’s fiscal year ends on the last Saturday of September. Normally, the tax year cannot be longer than 53 weeks.
If a business has been in existence for a short period during a year or you intend to change your tax year, the IRS allows you to file returns for a short tax year.
In addition to the federal income tax, States also have their own income taxes. Excepting nine states, all the other states in the US have a state income tax. Generally, the tax year adopted by them is in line with the federal tax year as also the due dates.
If you are an employed person, your employer will withhold taxes and remit them to the federal government. You can ask your employer to increase the withholding percentage to ensure that you do not fall foul of the income tax requirements. If, in addition, you earn income from another source, like interest, dividends, etc., you will be required to pay estimated taxes on the same separately if not included in the withheld taxes. Generally, you must pay an estimated tax for a tax year if your tax liability would be at least $1,000 after subtracting your withholding and tax credits. This also applies if you expect your withholding and tax credits to be less than the smaller of:
- 90% of the tax to be shown on your present tax year return, or
- 100% of the tax shown on your earlier full tax year return
Tax Due Dates in the US
If your tax year is the calendar year, you are expected to pay the estimated tax due on four payment periods:
- January 1 to March 31 on April 15
- April 1 to May 31 on June 15
- July 1 to August 31 on September 15
- September 1 to December 31 on January 15 next year
If you intend to file your return before January 31, you can put off the January 15 payment and pay it by January 31 along with your return, without incurring any interest. If any of these dates fall on a Saturday, Sunday, or a legal holiday, you can pay on the next working day following these holidays. You would need to rework your estimated taxes for each of the payment periods for any changes in your income stream and pay accordingly.
If, however, your tax year does not start on January 1, your payment due dates would be the 15th day of the 4th month of your fiscal year, the 15th day of the 6th month of your fiscal year, the 15th day of the 9th month of your fiscal year, and the 15th day of the 1st month after the end of your fiscal year. If you file your income tax return by the last day of the first month after the end of your fiscal year and pay all the tax you owe with your return, you would not need to make the last payment.
March 15 is the due date for filing returns in the case of partnerships and S corporations. While there is no tax liability on partnerships, individual partners need to pay tax based on the return by April 15. S corporations have to file returns and pay all taxes due by this date. This is also the last date for filing requests for an automatic extension of six months for filing returns.
April 15 is the last date for filing of returns and payment of taxes due by individuals and corporates. In case you need an automatic extension of six months, you should file your request by this date.
In case you have chosen a fiscal tax year, the last date for filing your return and paying taxes would be the 15th day of the fourth month following the year-end. In the case of partnerships, it would be the 15th day of the third month from the end of the tax year. For C and S corporations, the last date for filing returns and paying taxes would be the 15th day of the fourth month from the end of the tax year.