For those who fall in the bracket, the third instalment of advance tax is due for payment on December 15. There's a common misconception that advance tax obligations only apply to high-income individuals and those having income from a business or profession. However, the reality is that even a salaried individual might be subject to advance tax if he or she has additional sources of income apart from the salary. Let's delve deeper into this matter.
What is advance tax?
Advance tax refers to the tax payment made within the fiscal year in which the income is earned as well as the income expected to be earned. “Advance payment of tax follows the ‘pay as you earn’ principle. As per Section 208 of the Income-tax Act, 1961, every taxpayer shall be liable to pay the advance tax liability to the income tax department if the estimated tax liability for the year exceeds Rs 10,000,” said Yeeshu Sehgal, head of tax market, AKM Global, a tax and consulting firm.
“This provision encompasses the special exemption for resident senior citizens not having any income from business or profession,” added Sehgal.
Taxpayers are required to pay their annual estimated advance tax liability in four instalments: 15 percent by June 15, 45 percent by September 15, 75 percent by December 15 and 100 percent by March 15. Therefore, the impending deadline of December 15 requires payment of the third instalment of advance tax. In case of a change in tax liability subsequent to the payment of the first or second instalment, individuals can revise the quantum of advance tax in the current and upcoming instalment and fulfil the tax obligations based on the revised estimates.
Common misconception about advance tax
The most prevalent and significant fallacy is regarding the applicability of advance tax liability. “A common misconception is that only individuals earning from business and profession must pay advance tax. However, it applies to anyone with an estimated tax liability of Rs 10,000 or more,” said Neeraj Agarwala, partner at consulting firm Nangia Andersen India.
As a salaried individual, your employer disburses your salary after deducting tax at source (TDS). If you haven't disclosed additional income, if any, the TDS calculation by your employer is solely based on your salary income. However, “despite TDS deductions, one must be cautious, as income not declared to the employer, like house property (rental income), capital gains, interest, etc., may lead to unpaid advance tax”, said Agarwala.
According to Sehgal, some of the common mistakes include “not estimating income properly for the year, ignoring the variable sources of income such as rentals, interest, freelance income, if any, not taking account eligible deductions, etc. Besides that, sometimes, incorrect selection of the relevant assessment year, minor and major heads while making the challan payment are also common mistakes that taxpayers make.”
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How to calculate advance tax liability?
Taxpayers who are liable to pay advance tax are required to estimate their current income and pay advance tax on their own. In such cases, they are not required to submit any estimate or statement of income to the tax authorities. “While computing their advance tax liability, taxpayers should consider proper estimates of the income and take into account all the sources of income while doing the advance tax calculations. It is advisable for taxpayers to maintain accurate records of income, expenses and deductions for proper advance tax assessment. Besides, the records of return filing would help adjust the credit while filing the income tax return,” said Sehgal
If you find it difficult to calculate the advance tax liability, you may use calculator provided by the income tax department.
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Consequences of not paying advance tax
If you miss paying advance tax on time or pay less than the required amount, the due amount attracts penal interest on a monthly basis. “Failing to pay by the due date incurs a 1 percent per month interest charge,” said Agarwala. For instance, assuming your tax liability was determined to be Rs 1 lakh for fiscal year 2023-24 by June 15, 2023, (the due date for the first portion of advance tax), you should have paid Rs 15,000 (15 percent of Rs 1 lakh) as the first instalment.
If you missed paying the entire amount, your total advance tax liability for the second instalment on September 15 would be Rs 45,000 (45 percent of Rs 1 lakh) along with interest on the first instalment dues. Interest would be applicable at 1 percent per month for three months, i.e., from June 15 to September 15, resulting in Rs 450 (3 percent of Rs 15,000). Therefore, the total amount due to stay compliant would be Rs 45,450.
Failure to clear the second tranche completely would escalate your total advance tax liability for the upcoming third instalment to Rs 75,000 (75 percent of Rs 1 lakh). Interest would apply at 1 percent per month for six months, i.e., from June 15 to December 15 on the unpaid first instalment dues (Rs 15,000) and for three months, i.e., from September 15 to December 15, on account of the second instalment (Rs 30,000, i.e., Rs 45,000 minus Rs 15,000), resulting in a penalty of Rs 900 and Rs 900, respectively.
Therefore, to fulfil your third instalment of advance tax liability by December 15, you would be required to pay a total of Rs 76,800 (Rs 75,000 plus Rs 900 plus Rs 900).
Furthermore, if you neglect to pay even the third instalment of advance tax, the interest calculation will persist until you finally settle the outstanding taxes.
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