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.

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

 Below are the dates and percentages of when the advance tax is to be paid :
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 September you will need to pay 30% which comes to Rs 30,000/-.
By 15th December you will have to cover 60%, so you will need to pay another Rs 30,000/-.
By 15th March, 100% of advance tax comes to Rs 100,000/, you will need to pay another Rs 40,000/-.

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 is 31st of July. Ex: Due Date for current year, which is Assessment Year 2013-2014 or Financial Year 2012-2013 is 31st July 2013.

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.

Rahul has  estimated his total  tax payable as Rs.1,00,000 for this financial year. Let’s see how 234 C will work if he didn’t pay anything.

# Particulars Expected Payment (1) Paid(2) Shortfall(1-2) 234 C Calculation 234 C Interest in Rs.
1 By 15th September 30,000 0 30,000 1% p.m. for 3 months upto December 15 th on Rs. 30,000 900
2 By December 15th 60,000 0 60,000 1% p.m. for 3 months upto March 15th on Rs. 60,000 1,800
3 By March 15th 1,00,000 0 1,00,000 1% p.m on Rs. 1,00,000 1000
Total 234 C 3,700

*Tax Payable = Income Tax on total Income – Tax Deducted at Source.

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:

Rajan has  estimated  his  total taxes payable as Rs.1,00,000 and he has paid 50,000 as advance Tax till March 31st 2013. He pays the balance in July while filing his income tax return. Let’s see how 234 B will be applied to him

# Particulars Rs.
1 Total Tax Payable 1,00,000
2 Advance Tax paid till March 31st 2013 50,000
3 Balance Tax Payable (as of March 31st 2013) 50,000
4 Interest @ 1% / Month on 50,000 500 / Month
5 234 B = (for 4 Months ( Apr – July) 4 * 500) 2000

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

Let’s illustrate this with another example.
Let’s say you are an individual taxpayer and are liable to pay Rs 10,000 by way of advance tax. Suppose you pay Rs 9,500 in three instalments (Rs 3,000 on September 14, Rs 2,000 on December 15, and Rs 4,500 on March 15), would you have kept to your payment schedule?
  1. There will have been be no default in respect of the first instalment (Rs 3,000, which is 30 per cent of Rs 10,000).
  2. The second installment amount should, however, have been Rs 3,000 (60 per cent of Rs 10,000, less Rs 3,000 paid in the first instalment). Hence, the shortfall is Rs 1,000, on which the interest payable is Rs 30 (1 per cent of Rs 1,000 for three months).
  3. Since the third installment is Rs 4,500, there will have been a shortfall of Rs 500, on which the interest charged would be Rs 5 (1 per cent of Rs 500 for a month).
Thus, you end up with a penal interest of Rs 35 for the year. If in the last month, that is March, you delay payment of the last instalment by even a day, you will have to pay interest on the entire balance of Rs 5,000.It is suggested that the best strategy for paying advance tax should be to pay a little extra for first 2 installments and then paying amount close to the total tax liability during the third installment. One should also try not to pay extra amount so as to avoid any hassles of refund as is it best to pay nominal interest amount later on.

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.

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