What if you have failed to pay advance tax?

The income tax return filing season in on. The government believes in the philosophy of “Pay as your earn.” This objective is achieved through two pronged strategy. The first strategy is to ensure that the income is paid to the recipient after deduction of tax at the time of payment of the income. Which is implemented through tax deduction at source (TDS) or Tax collected at source (TCS). For the remainders who are not fully covered under the first strategy, the government uses the second strategy of making them to discharge their tax liability by way of payment of advance tax as and when they are earning.

What is advance tax and who has to pay it

Every person whose net tax liability after adjustment of TDS etc. is more than Rupees 10,000/- in a year has to pay advance tax. An individual has to pay her advance tax in three instalments on 15^th September, 15^th December, and 15^th March of the financial year in the ratio of 30%, 30% and 40% respectively of their net tax liability for the year. So in case your advance tax liability is RS. 1,00,000/- your have to pay this by way of instalments of Rs. 30,000, 30,000 and Rs. 40,000/- on 15h September, 15^th December and 15^th March respectively.

In case you fail to pay advance tax or there is shortfall in advance tax paid by you, you can still pay the advance tax latest by 31st March of the same financial year. In case there is default or short fall in payment of the above instalments of advance tax, the short fall can be made good in subsequent instalment. However for such short fall or default you have to pay interest @ 1% per month for three months. So for example in case you fail to pay the first instalment due on 15^th September, you will have to pay an interest of Rs. 900/- in case you decide to pay the first instalment amount on anytime after 15^th September but before 15^th December. Please note that the interest is payable even for a delay of one day. So even if you pay the instalment of advance tax on 16^th September, you will have to pay the interest of Rs. 900/-. So please pay your advance tax instalment well in time to avoid such exorbitant interest for small delay of a few days.

It may be noted that in case you are a senior citizen and do not have any income taxable under the head “Profits and gains of business or profession”, you have exemption from payment of advance tax and the net tax payable on your income for the whole year can be paid at the time of filing of income tax return by the due date of filing of the income tax return.

What if you fail to pay advance tax by 31^st March of the financial year

All is not lost in case you fail to pay advance tax by end of the financial year, you can still discharge your tax liability after end of the financial year but the tax so paid is treated self assessment tax and not advance tax. For non payment of advance tax you will also have to pay interest @ 1% for month of part of the month from 1^st April of the following year till your actually discharge you liability of tax by way of payment of self assessment tax. However in case the short fall in payment of advance tax is not more than 10% of your tax liability, you do not have to pay any interest.

In addition to the interest for non payment of advance tax, you will also have to pay interest for default for non payment of each instalment as explained above.

It is important to bring to the notice of the readers that in case you have defaulted on payment of advance tax or there is shortfall in payment of advance tax, in addition to the above interest @ 1% till you actually pay the self assessment tax, you will also have to pay penal interest in case you fail to file your income tax return by the due date which is generally 31^st July but extended to 31^st August this year. The interest is chargeable from the due date of filing of your return till actually date of filing of your return. This penal interest is payable in case you file your income tax return beyond the due date even if you have already made good the short fall in advance tax by way of payment of self assessment tax even before due date of filing of the return.

So in case you have not fully paid your advance tax you should pay the self assessment tax and file the income tax return at the earliest by latest by the due date for this year i.e. 31^st August 2015.

I am sure the above discussion will help a tax payers to understand the implications for defaulting in payment of advance tax.