All you wanted to know about accounting year

Parvatha Vardhini C | Updated on December 31, 2018 Published on December 31, 2018

January 1 marks the beginning of a brand new year, but only for making resolutions or renewing your old promises. For the government, many businesses, investors and taxpayers in India, it is the year beginning from April 1 that matters.

What is it?

The 12-month period from April 1 to March 31 is widely accepted as the accounting/fiscal/financial year in our country. This was adopted by the British government in 1867 to align India’s financial year with that of the British Empire. Other British colonies such as Hong Kong and Canada too follow the April-March routine. Prior to 1867, India’s fiscal year ran from May 1 to April 30.

Most companies and businesses in India follow the April to March accounting cycle, that syncs with the fiscal year of the government. But some companies follow a different cycle. For instance, Nestle India follows a January to December accounting year while Gillette India’s financial year ends on June 30. Others such as MRF (October-September) and Bosch (January-December), which used to follow different accounting years, realigned to April-March recently when the new Companies Act called for a uniform financial year. Companies such as Nestle and Gillette have sought exemptions to continue with their old system. The RBI too follows its own accounting year. As it likes to present an aggregate picture after all banks come out with their numbers, its accounting year begins with a three-month lag and follows a July-June cycle.

Why is it important?

The accounting year is the time period for which governments draw up the estimate of income and expenditure for the country/state. It is the period for which the government sets out its financial and economic goals and lays down the means to raise funds for the same. The action plan (Budget) for the upcoming fiscal year beginning April is usually presented by the government towards the end of the previous fiscal. Considering that taxation is one of the major sources of revenue for the government, the tax year too runs from April to March. The income earned in one accounting year (called the previous year) is subject to tax in the following accounting year (called assessment year). Most companies and other business entities too fall in line with the fiscal year of the government and tax department, as it ensures uniformity and aids easy comparison of data.

In 2016-17, the NDA government mooted the idea of changing India’s accounting year to the calendar year — from January to December. Among the other key reasons cited were that the current accounting year does not take into account the impact of the monsoons on the fisc. While the reasons for the changeover did hold water, it has been on the back-burner so far.

Why should I care?

You can make new financial resolutions on January 1 and start investing right away, but the taxation on your investments will follow the April-March cycle. Your tax returns are filed for every financial year from April to March. The deadline for making tax saving investments under Section 80C, such as PPF, ELSS, etc., falls on March 31. All tax-related changes announced in the Budget of any year are applicable for income earned from April 1 of the following year. But when it comes to your LTA, the cycle shifts to the calendar year. Tax breaks for leave travel can be claimed for two calendar years in a block of four. Perhaps, taking a cue from this, your leave entitlements at work also predominantly follow a January-December calendar.

The bottomline

January 1 may be the de facto New Year, but its April 1 de jure.

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Published on December 31, 2018
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