advance tax

Pay advance tax on personal income- save interest

Income Tax Department strives to make it as easy and convenient for citizens to comply with advance tax payments. So, one has the option of paying it in 4 installments over the financial year. However, if you default, there are some consequences in the form of interest penalty. While salary is subject to tax withholding by the employer (TDS), it is the taxpayer’s personal income such as rental, business income, capital gains, interest income, etc. that triggers advance tax obligation.

In order to compute advance tax liability, a taxpayer is required to estimate his total income for the year and calculate tax payable thereon. It is advisable to make a fair assessment of the estimated income at the start of the year and revisit it periodically. This helps in ensuring that accurate amount of taxes are deposited by way of advance tax after considering the impact of withheld taxes.

The provisions dealing with advance tax payment comes under two sections:

Section 234C:

Under this section, if advance tax is not paid on schedule, an interest of 1% will be charged. This interest is for deferment in installments of advance tax. You will have to pay interest on advance tax due if you do not pay:

  • 15% of your tax liability by 15th June
  • 45% of your tax liability by 15th September
  • 75% of your tax liability by 15th December
  • 100% of your tax liability by 15th March

The interest for late payment is set at 1% per month for the first 3 quarters & 1% for fourth quarter on the amount of tax due. It is calculated from the individual cut off dates shown above, till the date of actual payment of outstanding taxes.

Note that no interest is payable if there is any shortfall in payment of advance tax due, if it is on account of underestimation or failure to estimate amount of capital gains or speculative income. Since income from capital gains cannot be anticipated, advance tax on capital gains becomes payable starting from the quarter in which the capital asset is sold.

Section 234B:

Under this section, if you do not pay 90% of the tax payable before the end of the fiscal year, then an interest of 1% is applicable. That is, if have either not paid any tax for an assessment year, or paid less than 90% of the advance tax due, then you’ll have to pay 1% simple interest on the tax dues. This would be considered as defaulting of tax payment.

If you have not paid tax until the beginning of the next financial year, then interest is calculated from 1st April of the new fiscal year, until total income is determined under Section 143(1) or until when self-assessment tax is paid, whichever is earlier.

In addition to this, if you have been given a refund by the Income Tax Department but on assessment it is found that no refund or less refund was due to the taxpayer, then you would be asked to return the excess refund with an interest of 0.5% per month.

It is to be noted that individual taxpayers whose tax liability after adjusting the withheld taxes does not exceed Rs 10,000 are not required to pay advance tax. Further, resident senior citizens (individuals aged 60 years or more) not having any income from business and profession are also exempted from advance tax provisions.

It is worth mentioning here that the law provides respite from the levy of interest, in case of a slight shortfall in payment of advance tax. If an individual has paid up to 12% and 36% (instead of 15% and 45%) of the total advance tax liability by 15th June and 15th September , respectively, then he or she would not be liable to pay interest for the first two quarters.

Thus to sum up the interest payable in case of any shortfall in the deposition of advance tax is to be calculated at 1% per month for a period of three months for the first three quarters (April till December), and at 1% per month for one month for the last quarter (January to March). In addition to this, if 90% of advance tax liability is not deposited before 31st March (the last date of a tax year), the taxpayer is subject to an interest of 1% per month till the tax is paid.

Ignorance of the law is no longer an excuse. One need to take time out from one’s busy schedule during the year to ensure timely compliance with tax provisions and to make sure that the advance tax provisions are adhered to obviate any possible interest cost.

Income tax notice u/s 143(1)(a)

Do you have to file income tax returns?

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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