Advance tax is paid on the principle of 'pay as you earn' and is payable within the same financial year in which the income is earned.
As we draw closer to the financial year-end, i.e. 31st March, it is obligatory for us to verify and ensure that all the taxes due on the incomes earned during the year are paid. Advance tax is paid on the principle of “pay as you earn” and is payable within the same financial year in which the income is earned. Provisions of the Income-Tax Act, 1961 provide the prescribed due dates for payment of advance tax which is payable in instalments.
An individual is liable to pay advance tax up to 15% of it payable on or before 15th June, up to 45% on or before 15th September, up to 75% on or before 15th December, and up to 100% on or before March 15 of the financial year.
How is advance tax computed?
The advance tax payable is computed on the basis of the estimated income of the individual for that financial year. Income of any nature like capital gains, interests, dividends, income from running business or winnings from lottery etc. is considered while determining the estimated income for the purpose of computing the advance tax liability.
As per the provisions of the I-T Act, advance tax becomes payable when the total income tax payable by an individual in a financial year is likely to be Rs 10,000 or more. Further, while computing the advance tax liability, taxes deducted at source and relief claimed under section 90 / 91 of the Act has to be reduced from the total tax liability and the balance taxes are to be discharged in the from of advance tax.
Let’s take an example of an individual having business income, interest income besides salary income. In such a case, taxes on the salary income need to be deducted by the employer as part of TDS and part of taxes on interest income need to be deducted by the payer as TDS. Hence, advance tax need to be computed on business income and the remaining portion of interest income (provided such income was not disclosed to the employer) and should be paid in instalments.
Thus, advance tax applies to all taxpayers — salaried, freelancers, and businessmen. It is, however, pertinent to note that a resident senior citizen, aged 60 years or more, having income from any source other than income from business /profession is exempted to discharge the taxes payable through the advance tax mechanism. Hence, such individuals can pay taxes at the time of filing the tax return.
When is interest payable?
An individual is liable to pay interest in case he defaults in paying advance tax or has failed to deposit advance tax. If 90% of the advance taxes due is not paid within the prescribed due date, interest @ 1% is charged for non-payment of advance tax for each month (including part month) till taxes are paid. Further, interest is also levied for deferred payment of advance tax @1% per month. It is significant to note that interest is not levied for any shortfall in the payment of advance tax on account of underestimation or failure to estimate income from capital gains.
It need to be noted that if an individual has even paid 12% and 36% of the taxes payable by June 15th and September 15th, respectively, (instead of the entire 15% and 45% tax liability) there would not be any interest payable under deferment of payment of advance tax.
To conclude, as we are approaching the due date, i.e. 15th March, for payment of the final instalment of advance tax for the year ending March 31, 2018, the same needs to be discharged on time to be a tax-compliant citizen as well as to avoid interest consequences.
(By Akhil Chandna, Director, Grant Thornton India LLP, with inputs from CA Ridhi Sanghvi)