TDS vs. Advance Tax: What Every Taxpayer Needs to Know

Introduction

An essential mechanism for generating revenue for the government which helps to facilitate fund public services and infrastructure. Among the various tax collection methods, TDS and advance tax plays a major role. TDS is designed to collect tax at the source of income while advance tax ensures that taxpayers pay their dues in a timely manner throughout the financial year. For an individual and businessman, it is very essential to pay tax Timely to avoid any charges and penalties. Among the taxpayers there a misconception that TDS is sufficient enough to meet their tax obligation which led many to overlook advance tax payment led to penalties and interest.

Understanding TDS (Tax Deducted at Source)

What is TDS?

TDS is a system where tax is deducted at the source of income itself because the receipt and get the payment the primary purpose is to collect tax in advance and prevent the tax evasion with collecting Tax at the source the government can reduce the risk of individuals under reporting their income

How does TDS work?

The entity making a payment (deductor) deduct tax before transferring the amount to the recipient (deductory).

It applies to the salaries, interest, rent, Commission, professional fees, contract payments and more. The deducted tax must be deposited with the comment within the prescribed due dates

Key Sections of TDS

The Income Tax Act states various section that governs the TDS deduction. Some key sections include:

• Section 192A- TDS on premature withdrawal of Employee Provident Fund
• Section 194A -TDS on interest other than interest on securities applicable to bank financial institution
• Section 192C -TDS on payments made to contractors for the services rendered

TDS Rates & Applicability

Rates for TDS vary based on the nature of income and the recipient’s status. For salaried individuals, TDS is deducted as per the applicable income tax slab rates. Different rates apply to professionals, contractors, and other categories of income.

For example:

– Salaried individuals may have TDS deducted by employers at rates corresponding to their income tax slab.

– Freelancer’s, Professional’s, Businesses must comply with TDS provisions when making payment exceeding the threshold limits. Like Professionals may have TDS deducted at a flat rate of 10% on fees received.

TDS Exemptions & Refund Process

Certain incomes are exempt from TDS, such as:

• Interest on savings accounts up to a specified limit (currently ₹10,000).
• Certain types of agricultural income.

TDS deduction can be avoided any person if their total income is less than the taxable limit, by submitting Form 15G or 15H. But if TDS is deducted in excess of the actual tax liability, taxpayers can request refund on submitting their Income Tax Return along with the necessary required paper to the Income Tax Department.

Understanding Advance Tax

What is Advance Tax?

Income tax that is paid in advance in certain installments instead of a lump sum at the end of the financial year. It is applicable to taxpayers whose total tax liability exceeds a certain threshold, ensuring that tax payments are made throughout the year.

Who needs to pay Advance Tax?

Individuals and businesses whose total tax lability exceeds ₹10,000 in a financial year are required to pay Advance Tax. This includes:

• Salaried individuals with additional income e.g., from investments.
• Freelancers and professionals with no employer to deduct TDS
• Business owners with significant profits.

Advance Tax Payment Schedule (Deadlines & Instalments)

Individuals who are liable to pay the advance tax shall pay the same, in four instalments during each financial year and the due date of each instalment and the amount of such instalment shall be as specified in the Table below:

 To illustrate, consider a taxpayer who estimates their total income for the financial year to be ₹20,00,000, resulting in a tax liability of 2,00,000. The Advance Tax payments would be structured as follows by:

June 15: 15% of ₹2,00,000 = 30,000

September 15: 45% of 2,00,000 – 30,000(cumulative) = 60,000

December 15: 75% of ₹2,00,000 – 90,000 (cumulative) = 60,000

March 15:  100% of ₹2,00,000 -1,50,000 (cumulative) = 50,000

Taxpayers can efficiently manage their cash flow and prevent financial strain from a hefty payment at the end of the fiscal year thanks to this planned payment schedule. If any does not pay on the specified dates, any instalment of the advance tax that he is required to pay, he shall be deemed to be in default in respect of such instalment or instalments and shall be liable to interest and penalty under sections 220 and 221.

Taxpayers falls under the Presumptive Taxation Scheme (Sections 44AD/ Section 44ADA) are required to pay the full amount of Advance Tax in a single instalment by March 15.

Consequences of Late or Non-Payment

• Section 234B- If advance tax is not paid or the amount of advance tax paid is less than 90% of the assessed tax, the taxpayer shall be liable to pay simple interest @ 1% per month from first day of April following the financial year.
• Section 234C- Advance tax has to be paid in various instalments. If any instalment is not paid or less paid, interest is chargeable for non-payment or late payment calculated at 1% per month on the amount short of payment for each instalment.

For example: – Apurva, an independent graphic designer, makes 12 lakh each year. Because no employer withholds TDS for him, he believes he can settle his tax at the year’s conclusion. Nonetheless, he is taken aback when confronted with an interest penalty under Sections 234B and 234C for failing to pay Advance Tax. If he had organized things more effectively, he might have evaded these unnecessary expenses

Key Differences Between TDS and Advance Tax 

How TDS and Advance Tax Impact Different Taxpayers

i. Salaried Individuals: Usually covered under TDS, as employers deduct tax from salaries. However, they may also have additional income that requires to pay Advance Tax payments.

ii. Freelancers & Professionals: No employer to deduct TDS, so Advance Tax liability is crucial making it essential for them to calculate and pay Advance Tax based on their estimated income.

iii. Business Owners & Startups: Need to balance both TDS on payments and their own Advance Tax. This dual responsibility requires careful financial management.

iv. Senior Citizens: Exempt from Advance Tax unless they have business income. However, they should still be aware of TDS implications on their income sources.

Common Mistakes & How to Avoid Them

• Not checking if Advance Tax applies

Freelancers & investors ignore this often the requirement to pay Advance Tax, assuming that TDS is sufficient. It is crucial to assess total income and tax lability to determine if Advance Tax is necessary.

• Assuming TDS is enough

By ignoring other income sources many taxpayers mistakenly believe that TDS deducted from their salary or other income is all they need to pay. This can lead to underpayment if they have additional income sources.

• Paying Advance Tax in one go

Some taxpayers may opt to pay all advance taxes owed in a single direct deposit. Depending on individual cash flow circumstances, this might sometimes create issues of liquidity. It is optimally sound to make consecutive payments over the entire duration of the accounting year.

• Ignoring TDS deductions when filing ITR

One can miss out on expected refunds due to not taking into account already paid TDS and the same as delays on refund waiting periods. It is incumbent upon taxpayers to see that every TDS certificate filed is reflected in the Income Tax Return no matter how frivolous it might seem.

Tax Planning Tips to Optimize TDS & Advance Tax

• Estimate taxable income correctly at the start of the year – At the beginning of the financial year taxpayers should estimate their expected Income and tax lability. This helps in panning Advance Tax payments effectively.
• Utilize Exemptions and Deductions – Familiarize yourself with available exemptions and deductions to reduce overall tax lability. Investments in specified financial instruments, such as Public Provident Fund (PPF) or National Pension Scheme (NPS), can lower taxable income.
• Keep track of TDS deducted and adjust Advance Tax accordingly – Regularly monitor TDS deductions from your Income to ensure that you adjust your Advance Tax payments accordingly. This helps it avoiding excess payments or underpayment
• Use online tools & calculators to simplify tax calculations – Leverage online lax calculators and tours to simplify tax calculations and ensure accurate estimations of tax liabilities. Many financial websites offer user-friendly calculators that can assist in planning.

Conclusion

All Indian taxpayers must comprehend TDS and Advance Tax since these procedures are critical to both tax collection and overall financial planning.  While Advance Tax enables taxpayers to proactively manage their tax responsibilities throughout the fiscal year, TDS guarantees that tax is collected at the source, giving the government a consistent income stream. By being aware of their obligations regarding TDS and Advance Tax, taxpayers can prevent fines, guarantee adherence to tax regulations, and sustain improved financial management by being informed of their responsibilities with relation to TDS and Advance Tax.  In addition to reducing tax obligations, proactive tax planning promotes a responsible financial culture.

Call to Action: Still confused about whether you owe Advance Tax? Use an online tax calculator and plan wisely to stay ahead of your tax obligations! Engaging with a tax professional can also provide personalized guidance tailored to your financial situation.

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Author Ishita Mehta is 4th year student of BBA LLB at lovely professional university