Last week, during one of our tax workshops, we were asked about Advance Tax. While the concept of advance tax is simple, it requires an in-depth explanation to fully grasp how it works. Are you, as an individual, liable to pay advance tax? Let’s find out.
First off, there are mainly three types of taxes we should be aware of:
- TDS (Tax Deducted at Source)
- Self-Assessment Tax
- Advance Tax
TDS
As a salaried employee, your employer deducts a certain amount of tax from your salary every month. This is known as TDS, or tax deducted at source. Similarly, if you are a freelancer, the organization that hires you will deduct a flat rate of tax on your earnings.
Self-Assessment Tax
Self-assessment tax, as the name suggests, is the tax amount assessed by you at the end of the year and paid directly to the government. You might be required to pay SA tax if the TDS deducted is inadequate, or if absolutely no TDS was deducted. This tax is paid only at the time of filing your income tax return, if at all.
Advance Tax
When your total tax payable for a financial year is ₹10,000 or more, advance tax comes into the picture. Advance tax is to be paid in parts during the year, as per the tax rules.
What are these rules?
Advance Tax Due Dates Advance Tax Payable*
- On or before 15th June — 15% of total estimated tax for the year
- On or before 15th September — 45% of total estimated tax for the year
- On or before 15th December — 75% of total estimated tax for the year
- On or before 15th March — 100% of total estimated tax for the year
Now, there are a few questions that might crop up when you learn about Advance Tax.
1) My company deducts TDS. Do I still need to pay advance tax?
Tax deducted at source (TDS) can also take care of advance tax. However, your employer will only deduct tax on your salary income. In case you have other income, from say sale of shares or mutual funds, interest on fixed deposits, rental income and so on, your tax liability would need to be assessed taking these into account. It is only if the TDS is inadequate that advance tax might need to be paid as well.
2) What happens if I don’t pay any advance tax?
Not everyone needs to pay Advance Tax. But if you are liable to pay, and you fail to pay in whole or part, Section 234B and 234C of the Income Tax Act, 1961 will come into play, attracting certain penalties.
Section 234B: When advance tax to be paid was not paid at all, or paid less than 90% of total. The penalty is 1% per month.
Section 234C: When advance tax installments are delayed, there is a 1% interest per month from the due date until the date of actual payment.
To give an example, say your total tax payable is ₹50,000. And let’s assume that your employer did not cut TDS (this may happen when you switch jobs in the middle of the financial year and your new employer isn’t aware of the previous months’ income). In such a situation, you would be required to pay the tax along with the interests under 234B and 234C as above.
These calculations might seem complicated, but we have calculators to help us out – https://www.incometaxindia.gov.in/Pages/tools/income-tax-calculator-234ABC.aspx. The important thing here is to be aware of provisions of the Act, and know when and how to act on them.
3) How to calculate advance tax?
First calculate your total income, reducing all the deductions for the year. Next, calculate the total tax payable for the year based on which slab rate your income falls under. Finally, split the total tax into the four installments as per the table above. You may take the help of this calculator here: https://www.incometaxindia.gov.in/pages/tools/advance-tax-calculator.aspx, although be warned, while the calculations are correct, the installment years are outdated.
It is also important to note that Section 115BAC in this calculator link refers to taxation under the new regime. Unlike the old regime, no deductions (Chapter VI-A) are available as per the new regime. (Refer: https://rupiko.in/new-tax-regime-vs-old-which-is-better-for-you/)
4) How to pay advance tax?
Gone are the days when we needed to make a trip to our bank to pay taxes in cash or through a cheque. Whether you are paying advance tax or self-assessment tax, you may pay online via the Income Tax portal. The tax payment website is https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp.
December is already here. And that means that the third installment date for Advance Tax is fast approaching. Not only that, the due date to file your income tax return is less than four weeks away! Spend some time this weekend to get your taxes in order. Remember, Advance Tax only applies to you if your total tax liability is more than ₹10,000 and there hasn’t been enough or any TDS already cut by your employer for the current financial year.
If you need any help filing your return, or have any further questions about advance tax, don’t hesitate to write to me.
