Advance Tax:Details-What, How, Why

In this world nothing is certain but death and taxes” said Benjamin Franklin (Founding father of USA and face on America’s  One hundred dollar bill/note).

Jul 31 has just gone and we finished paying our self-assessment taxes for the last year. But the next deadline is round the corner. (These income tax guys will not let us sit in peace). The 15th Sep-the deadline to pay first installment of Advance tax. This article is all about Advance Tax for individuals.
Advance tax

What is Advance Tax?

Advance tax, as the name implies, is the tax that one pays in advance. Advance tax is the income tax that is payable if your tax liability exceeds Rs 10,000 and should be paid in the same year in which income is received. It is also called as “Pay as you Earn” scheme, since you pay the tax in the same year in which you earn income.

Who pays Advance Tax?

The provisions of the Income Tax Act make it obligatory for every individual, self-employed professional, businessman and corporate to pay Advance Tax, on any income on which TDS(Tax deducted at Source) is not paid. Both individuals as well as corporates must pay this tax.
For individuals, this is applied especially when (s)he has income  other than income from salary.  If  individual’s only income is his salary, then employer will deduct tax from his income and submit it. In such a case there is no cause for worry over advance tax payment. The tax deducted  will be made available to the employee by employer in Form 16. But when there is income from other sources such as: interest gained (on saving bank account), capital gains, lottery wins, from house property or from business, then advance tax becomes relevant. If you estimate that you will owe more than Rs.10,000 on March 31  in taxes (after deducting TDS) then you should pay advance tax.
Who doesn’t have to pay Advance Tax?

Advance Tax is NOT applicable when

  • From AY 2011-12 – When a taxpayer opts for the scheme of computing business income under section 44AD on presumptive basis @ 8% of turnover, such taxpayer shall be exempted from payment of advance tax for such business.
  • From AY 2013-14 – A senior citizen (resident individual who is 60 yrs or more) who does not have any income from business & profession, is not liable to pay advance tax.

Why Pay Advance Tax?

Advance tax is one of the major tools used by the Govt. to collect tax from the assesses  all over India. This prepaid form of tax is designed in such a way that an assessee is made to pay tax to the Govt. in a ‘Pay as You Earn Scheme’. This mainly aims at reducing the last moment hassles to an assessee for payment of tax liability which may be because of either shortage of time or funds.

The aim of the Indian government behind setting up the advance tax system was to speed up the tax collection. This system also allowed the government to earn interest on the amount collected as tax, thus increasing funds to the government coffers.
why tax

What if we do not Pay Advance Tax?

If you have to pay advance tax and If you fail to pay your Advance Tax or, if you pay less than the stipulated tax, you would be penalised and would have to pay extra under Sections 234A, 234B, 234C. So there is no escaping Tax.  As Income Tax office says “Pay Tax Karo Relax

The interest is calculated at 1% simple interest per month on the defaulted amount for three months. The interest penalty would continue up to the next deadline. If even after the last deadline of 15 March, the tax is not paid, then the 1% would be on the defaulted amount for a month, until the tax is fully paid.

How is it Calculated?

Advance tax is computed on income that an individual might earn during the year,  in that sense it is estimated income. The tax is calculated using the rates applicable for the financial year.

Suppose after paying your first installment of tax on the estimated income, you actual income increased due to some shares/mutual funds you sold, You will need to revise your income and accordingly pay the differential in the next installment.

Tax rates for  Assessment Year 2013-14 (F Y 2012-13)

Income Tax Rates/Slabs For Assessment Year 2012-13 (F Y 2011-12) Rate(%)
Up to 2,00,000Up to 2,00,000 (for women)Up to 2,50,000 (for resident individual of 60 years till 80 years) NIL
2,00,001 – 5,00,000Up to 500,000 (for resident individual of 80 years and above, Tax is nil) 10Nil
5,00,001  – 10,00,000 20
10,00,001 upwards 30

Advance tax dates and tax payable

From FY 2016-17  For both individual and corporate taxpayers

Due Date Advance Tax Payable
On or before 15th June 15% of advance tax
On or before 15th September 45% of advance tax
On or before 15th December 75% of advance tax
On or before 15th March 100% of advance tax
Below are the dates and percentages before FY 2016-17.
Due Date Installment % of Advance Tax
15th September Up-to 30%
15th December Up-to 60%
15th March Up-to 100%

For example, suppose your total tax liability(after deducting TDS)  for this year is Rs 1,00,000

So by 15th June you will need to pay 15% which comes to Rs 15,000
So by 15th September you will need to pay 45% which comes to Rs 45,00
By 15th December you will have to cover 75%, so you will need to pay another Rs 75,000.
By 15th March, 100% of advance tax comes to Rs 100,000, you will need to pay another Rs 25,000.

How to pay advance Tax?

Advance Tax can be paid by filing a Tax Payment Challan,ITNS 280.Challan, at designated branches of banks empanelled with the Income Tax Department. Branches of ICICI, HDFC and SBI accept Advance Tax Payment Challans. Alternatively, individuals could pay Advance Tax online through the Income Tax Dept / NSDL website. More on this later.

Penalty on not paying/paying less Advance Tax:Sections 234A, 234B and 234C.

If you owe more than Rs.10,000(after deducting TDS) while filing your returns, you will be penalized with  Interest under sections 234A , 234 B & 234 C

Under section 234A, the liability arises only when the return is filed after the due date which for AY 2016-17 is 5 Aug. Ex: Due Date for current year, which is Assessment Year 2013-2014 or Financial Year 2012-2013 is 5 Aug 2016.

Under section 234B, penalty arises when the total amount of advance tax paid along with the amount of TDS is less than 90% of the total tax liability. In such case interest is calculated at 1% per month of the amount of shortfall for time period from April to the month in which the return is filed.

Under Section 234C, there are three components. For the first installment, the shortfall penalty is calculated for 3 months @1% p.m. Similarly, in the second installment, the shortfall penalty is also calculated for 3 months @1% p.m and the final installment is calculated at a flat rate if 1% for 1 month only.

Finotax has great Advance tax calculators. Check it out here. Let’s look at these sections in detail.

Interest under section 234 C

234 C will be applicable if you don’t pay your advance taxes in regular installments.  As per the Income Tax Act,  you’re suppose to pay 30% of your advance tax by 15th Sep, 60% by 15th December and 100% by 15th March. Let’s see it through some examples.

Mr. Khushal is running a garments shop. Tax Liability of Mr. Khushal is Rs 45,500. He has paid advance tax as given below:

Rs. 8,000 on 15th June, Rs. 11,000 on 15th September,  Rs. 12,000 on 15th December,  Rs. 14,500 on 15th March.  Is he liable to pay interest under section 234C, if yes, then how much?

Any tax paid till 31st March will be treated as advance tax. Considering the above dates, the advance tax liability of Mr. Khushal at different installments will be as follows:

1) In first installment: Not less than 15% of tax payable should be paid by 15th June. The tax liability is Rs. 45,500 and 15% of 45,500 amounts to Rs. 6,825. Hence, he should pay Rs. 6,825 by 15thJune. He has paid Rs. 8,000, hence, there is no short payment in case of first installment.

2) In second installment: Not less than 45% of tax payable should be paid by 15thSeptember. Tax liability is Rs. 45,500 and 45% of 45,500 amounts to Rs. 20,475. Hence, he should pay Rs. 20,475 by 15th September. He has paid Rs. 8,000 on 15th June and Rs. 11,000 on 15th September (i.e. total of Rs. 19,000 is paid till 15thSeptember). There is short payment of Rs. 1,475 (i.e. Rs. 20,475 – Rs 19,000).

Though there is short payment of Rs. 1,475 but Mr. Khushal will not be liable to pay interest under section 234C because he has paid minimum of 36% of advance tax payable by 15th September. He has paid Rs. 19,000 till 15th September and 36% of 45,500 amounts to Rs. 16,380. Hence, no interest shall be levied in case of deferment of second installment.

3) In third installment: Not less than 75% of tax payable should be paid by 15th December. Tax liability is Rs. 45,500 and 75% of 45,500 amounts to Rs. 34,125. Hence, he should pay Rs. 34,125 by 15th December. He has paid Rs. 8,000 on 15th June, Rs. 11,000 on 15th September and Rs. 12,000 on 15th December (i.e. total of Rs. 31,000 is paid till 15thDecember). There is a short payment of Rs. 3,125 (i.e. Rs. 34,125 – Rs 31,000). Hence, he will be liable to pay interest under section 234C on account of short fall of Rs. 3,125 (*).

There is a short fall of Rs. 3,125 in case of third installment. Due to short fall in case of third installment, interest under section 234C will be levied. Interest will be levied at 1% per month or part of the month on the short paid amount of Rs. 3,100 (i.e. Rs. 3,125 rounded off to Rs. 3,100 as per Rule 119A). Interest will be levied for a period of 3 months. In other words, interest will be levied on Rs. 3,100 at 1% per month for 3 months. Interest under section 234C will come to Rs. 93.

4) In last installment: 100% of tax payable should be paid by 15th March. The total tax liability of Rs. 45,500 is paid by Mr. Khushal by 15th March (i.e. 8,000 on 15th June, Rs. 11,000 on15th September, Rs. 12,000 on 15th December and Rs 14,500 on 15th March). Hence, there is no short payment in case of last installment. Thus, Mr. Khushal will not be liable to pay interest under section 234C in case of last instalment.

Interest under section 234 B

234 B will be applicable when total advance tax paid is less than  90 % Tax Payable.  This will be charged at 1% per month till you pay your remaining taxes. Let’s work it out through an Example:

Mr. Suraj is a businessman. His tax liability as determined under section 143(1) is Rs. 28,400. He has not paid any advance tax but there is a TDS credit of Rs. 10,000 in his account. He has paid the balance tax on 31st July i.e. at the time of filing the return of income. Will he be liable to pay interest under section 234B, if yes, then how much

In this case, the tax liability (after allowing credit of TDS) of Mr. Suraj comes to Rs. 18,400 (i.e. Rs. 28,400 – Rs. 10,000) which exceeds Rs. 10,000 and hence, he will be liable to pay advance tax. He has not paid any advance tax and hence, he will be liable to pay interest under section 234B. Interest under section 234B will be levied at 1% per month or part of the month. In this case, Mr. Suraj has paid the outstanding tax on 31st July and hence, interest under section 234B will be levied for the period from 1st April to 31st July i.e. for 4 months. Interest will be levied on unpaid tax liability of Rs. 18,400. Interest at 1% per month on Rs. 18,400 for 4 months will come to Rs. 736.

If you pay our taxes in between April – July period then interest @1% will be applied only on the balance tax payable .

Online Advance Tax Calculators(Free)

If you want to cross check your advance tax or calculate I recommend following online advance Tax Calculators:
  • InvestmentYogi.com : Simple, Powerful Click here
  • Finotax.com:Detailed Calculator,shows all steps. Check it out here.

Paying Advance Tax

As mentioned earlier Advance Tax can be paid by filing a Tax Payment Challan, ITNS 280 Challan, at designated branches of banks empanelled with the Income Tax Department  or  through the Income Tax Dept / NSDL website.

ITNS 280 Challan: 

One can download  ITNS 280 Challan  from here. Fill it up and pay at the at designated branches of banks empanelled with the Income Tax Department. If you need help in how to fill challan one can see the slide show at incometaxindiapr.gov.in.  This is relevant but old so please fill the correct assessment year.

Pay Online or e-Payment 

e-Payment facilitates payment of direct taxes online by taxpayers. To avail of this facility the taxpayer is required to have a net-banking account with any of the Authorized Banks.

For Guide to ePayment Click here(official) or here(unofficial)

For ePayment Click here

Disclaimer: I am not a chartered account. This article is just for informational purpose.

It is  said “Income tax returns are the most imaginative fiction being written today.”  Hope you found the article helpful.  Please share your comments.

Related Post:Taxing Times in lighter vein:Jokes, Cartoons about Tax

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