Third installment of advance tax is due tomorrow. Missing the deadline may prove costly

December 15 is the due date for paying the third installment of advance tax.

Many taxpayers are not aware of advance tax liabilities whether they need to bother about it. This is the case especially with salaried individuals who believe that their tax liability is taken care of by the employer and they need not do anything on their own.

However, the fact is that even if you are a salaried individual and tax is getting deducted at source (TDS) by your employer, there can be scenarios where advance tax liability may arise for you. Read on to know all about it.

Also read: First year in the job? Complete your tax planning over the next three months

Understand your advance tax liability

Advance tax is the tax that you pay within the same financial year in which the income is earned. All taxpayers — salaried, freelancers, and businesses — whose estimated income results in tax liability of more than Rs 10,000 in the financial year are required to pay advance tax.

However, a resident senior citizen (an individual of the age of 60 years or above) not having any income from business or profession is not liable to pay advance tax. Also, a salaried person who doesn’t have any income other than salary, need not pay advance tax instalments, as employers are required to deduct the applicable tax from the monthly salary and pay to the Income Tax Department.

Advance tax to be paid in four installments

Taxpayers are required to pay their annual estimated advance tax liability in four instalments of 15 percent, 45 percent, 75 percent and 100 percent, on or before June 15, September 15, December 15 and March 15, respectively. This effectively means that they pay as they earn.

At the same time, the system ensures a steady flow of income tax to the exchequer. However, taxpayers who opted for the presumptive taxation scheme (PTS) of Section 44AD or Section 44ADA are liable to pay 100 percent of advance tax by March 15.

Also read: Filing returns under presumptive taxation scheme? You must continue doing so for five years 

Calculating the advance tax payable

The computation of advance tax can be done by estimating the gross total income. For this purpose, you should club the estimated income under all the five income heads — income from salaries, house property, capital gains, business or profession, and other sources. Now you need to calculate net income, by claiming deduction under various sections from 80C to 80U from the gross total income.

Once you have arrived at the net income, calculate the tax liability on the same according to the income tax slabs applicable to you.
You can also take the help of the calculator available on the income tax india website for advance tax calculation.

Next, calculate the advance tax liability for the upcoming instalment, i.e. 75 percent by December 15. You can deduct the advance tax paid earlier, TDS, tax collected at source (TCS), and so on from the 75 percent amount of the total estimated tax to be paid in the year. If there is any shortfall you should pay it on or before the due date.

For instance; if your total tax liability for the year is Rs 2 lakh, you should pay Rs 1.5 lakh (75% of Rs 2 lakh) as tax by December 15. If you have already paid Rs 1,25,000 in the form of advance tax and TDS, you should pay the remaining Rs 25,000 by December 15.

Also read: All about filing income tax returns

Choose the right assessment year while paying tax

You can pay the advance tax offline as well as online. To pay offline, use tax payment challans (challan no. 280) at bank branches authorised by the Income Tax Department. For paying online, log on to the income tax department’s website, www.incometaxindia.gov.in, and click on e-Pay taxes. You will then be directed to the National Securities Depository Ltd (NSDL) website. Click on challan number 280, fill in the required details and make the payment.

While making payment of tax, apart from other things, make sure you clearly mention the details in the challan. For instance, based on who you are — a company or an individual taxpayer — select the option under the head of payment, i.e., Corporation Tax/Income-tax (other than companies). Similarly, fill the correct amount and mode of payment of tax.

The most common error that taxpayers make is selecting the wrong Assessment Year (AY). Remember that for the current financial year i.e. 2022-23, the applicable AY is 2023-24. So, make sure you select the AY accordingly. You also need to fill up the Permanent Account Number (PAN). Once you put in all the details, these are displayed on the screen and should be confirmed before proceeding with making the payment.

Once the advance tax is paid, it will be reflected on the assessee's Form 26AS within three to four working days of making the payment.

Penalty for missing due dates

If you miss paying advance tax on time or pay less than the mandatorily required amount, the due amount attracts penal interest on a monthly basis. The penal interest at the rate of 1 percent per month kicks in if the shortfall in the advance tax instalment is more than 25 percent of the amount itself. Interest is charged on the shortfall amount.

For instance, if your tax liability was assessed on June 15, 2021, i.e. when the first instalment of advance tax becomes due, as Rs 2 lakh for fiscal 2022-23, you should have paid Rs 30,000 (15 percent of Rs 2 lakh) as the first instalment of the advance tax.

If you had missed paying the entire amount of the first instalment, your total advance tax liability for the second instalment on September 15 would have been Rs 90,000 (45 percent of Rs 2 lakh) along with interest on first instalment dues.

Interest would have been applicable at 1 percent per month for three months i.e., June 15 to September 15, Rs 900 (3% of Rs 30,000—first instalment dues). So, you should have paid a total of Rs 90,900 as tax to be on the right track.

If you also failed to clear the second installment of advance tax liability completely, your total advance tax liability for the upcoming third instalment would be Rs 1,50,000 (75 percent of Rs 2 lakh). Interest would be applicable at 1 percent per month for six months i.e., June 15 to December 15 on part of first instalment dues (Rs 30,000) and for three months i.e., September 15 to December 15 on part of the second instalment (Rs 30,000, i.e. Rs 90,000 minus Rs 60,000), Rs 1,800 and Rs 1,800 respectively.

The sum Rs 1,53,600 (Rs 1,50,000 plus Rs 1,800 plus Rs 1,800) shall be paid as the third instalment of advance tax liability, on or before December 15.
Further, if you fail to pay even the third instalment of advance tax, the interest calculation will continue until you pay the due taxes.