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Save interest cost by paying advance tax on personal income

Divya Baweja, Divya Agarwal and Tarun Garg

We are aware of the obligation to file tax returns on time. But what about ensuring timely compliance with payment of tax during the year? The tax laws cast an added responsibility on taxpayers to pay a specified percentage of tax by way of periodic payments during the year. These periodic tax payments are referred to as the advance tax.

To put it simply, advance tax is a mechanism to collect taxes by the government before the closure of a tax year. It helps the government with a constant flow of tax revenue during the year rather than at the year-end.

While salary is subject to tax withholding by the employer, it is the taxpayer’s personal income such as rental, business income, capital gains, interest income, etc. that triggers advance tax obligation.

In order to compute advance tax liability, a taxpayer is required to estimate his total income for the year and calculate tax payable thereon. It is advisable to make a fair assessment of the estimated income at the start of the year and revisit it periodically. This helps in ensuring that accurate amount of taxes are deposited by way of advance tax after considering the impact of withheld taxes. Since income from capital gains cannot be anticipated, advance tax on capital gains becomes payable starting from the quarter in which the capital asset is sold.

The laws mandate payment of advance tax in four instalments during the tax year. The due dates for payment of advance tax and the percentage of tax liability required to be deposited by such dates are mentioned in the table below:

Pay advance tax

It is to be noted that individual taxpayers whose tax liability after adjusting the withheld taxes does not exceed Rs 10,000 are not required to pay advance tax. Further, resident senior citizens (individuals aged 60 years or more) not having any income from business and profession are also exempted from advance tax provisions.

Exemption from the requirement to pay advance tax means that the above category of individuals will not be subject to mandatory interest cost for any shortfall in the deposition of advance tax during a tax year. They can safely deposit tax before filing their tax returns without being subjected to any interest cost.

The interest payable in case of any shortfall in the deposition of advance tax is to be calculated at 1 percent per month for a period of three months for the first three quarters (April till December), and at 1 percent per month for one month for the last quarter (January to March). In addition to this, if 90 percent of advance tax liability is not deposited before March 31 (the last date of a tax year), the taxpayer is subject to an interest of 1 percent per month till the tax is paid.

It is worth mentioning here that the law provides respite from the levy of interest, in case of a slight shortfall in payment of advance tax. If an individual has paid up to 12 percent and 36 percent (instead of 15 percent and 45 per cent) of the total advance tax liability by June 15 and September 15, respectively, then he or she would not be liable to pay interest for the first two quarters.

Recently, tax authorities have become vigilant in identifying cases where they have noticed shortfall in the deposition of the advance tax liability based on their estimate of taxable income. Hence, it is not unlikely for an individual to receive demand notices from the tax department for non-payment of advance tax. There is also an exposure of penalty proceedings being initiated by the tax department in cases where the taxpayers do not comply with such notices and pay advance tax.

Ignorance of the law is no longer an excuse. One needs to take time out from one’s busy schedule during the year to ensure timely compliance with tax provisions and to make sure that the advance tax provisions are adhered to obviate any possible interest cost.