The Government believes that the tax payers should discharge their income tax liability simultaneously while earning and expects you to “Pay as your earn.” This philosophy is implemented through two modes. One is collection and deduction of tax at source in most of the cases like salary, interest, rental, brokerage, commission, professional fee etc and for others who are not fully covered under the TDS or TCS, they have to discharge their net tax liability by paying advance tax. Some changes have been made in the advance tax provisions as far as applicable to an Individual. Let us discuss the applicable provisions in detail.
Who has to pay advance tax and when?
In case your tax liability after reducing the amount of TDS exceeds Rs. 10,000/- in a year, you are liable to pay advance tax. Earlier individuals were required to pay advance tax in three instalments on 15th September, 15th December and on 15th March of the financial year in the ratio of 30%, 30% and 40% respectively. The government is always hungry for money and does not mind putting the taxpayers to any inconvenience, so they have amended the law so as to require you to pay the advance tax in four installments namely 15th June, 15th September, 15th December and 15th March in the ratio of 15%, 30%, 30% and 25% respectively on these dates.
For people engaged in any business and who have opted for paying tax on assumed profit @ 8% on their gross turnover uto Rs. 2 Crore, they can pay whole of their advance tax by 15th March and need not pay three earlier instalments. However if they fail to pay it by 15th March and pay it after 15th March but before 31st March they will have to pay interest @ 1% for one month. 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 by 31st March of the same financial year and the same is treated as advance tax.
For any shortfall or default in payment of advance tax, you can make good the default or deficit in subsequent instalment/s. For each such delay you have to pay interest calculated @ 1% per month. But since the next instalment becomes due only after three months, you effectively pay interest for three months even if there is a delay of one day beyond the due date
So for example in case your advance tax liability comes to Rs. 1 lacs and you fail to pay the first instalment of Rs. 15,000/- due on 15th June , you will have to pay an interest of Rs. 450/- even if you have paid it on 16th June. So for even a day of default of one day you end up paying interest @ 3% on the default amount. So it is advisable to pay the advance tax well in advance and not to wait till the due date to avoid such exorbitant interest for delay of a few days.
In case you are a senior citizen the income tax law has soft corner for your and a exempts you from payment of advance tax even if your net tax liability exceeds Rs. 10,000/- for the year. However this exemption is not applicable in case you have any income from a business or a profession. This exemption is not available even if you have losses from business or profession.
What will happen if advance tax liability is not discharged by 31st March of the financial year?
For any reason in case you are not able to pay the advance tax before end of the financial year or there is short fall in your advance tax payment, all is not lost. The tax liability can still be discharged but with a cost. The same can be discharged after the year end but the payment gets another nomenclature, it is called self assessment tax and not advance tax.
The interest for such default is calculated @ 1% for month or part of the month from 1st April of the following year till your actually pay the self assessment tax. However in case the short fall in payment of advance tax against your net tax liability is not more than 10% of your overall tax liability, no interest is payable. In addition to the interest for non payment of advance tax, the interest @ 1% for three month is anyway payable in addition to what you pay with self assessment tax as explained above.
It is important to bring understand that that in case of default of shortfall in payment of advance tax, in addition to interest @ 1% till the date of actual payment of self assessment tax, you may also have to pay penal interest for delay in filing of your income tax returns beyond the due date which is generally 31st July for salaried and most of the tax payers. This interest is payable for the period beginning from the due date of filing of your return and ending with the actual date of fling of the return even in cases where you have already paid the self assessment tax by the due date of filing of income tax return.
So get ready to pay your first installment of advance tax which falls due on 15th June and have peaceful sleep.
(The author is a CA, CS and CFPCM. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal. He can be reached at email@example.com.)