With the March 15, 2024, deadline for advance tax payment drawing near, taxpayers need to get cracking right away. If you miss this deadline, be ready to pay penal interest on your tax dues.
But first, who has to pay advance tax?
Any individual who anticipates a tax liability of Rs 10,000 or more in a financial year is liable to pay advance tax over the course of that year, as per Section 208 of the Income Tax Act. If you are a senior citizen (aged 60 or above) with no income from any business or profession, then advance tax does not apply to you.
Advance tax is essentially a way for the taxman to collect tax on income as it is earned through the year, rather than all of it at the end of the year.
Paying advance tax
Salaried individuals are aware of tax deducted at source (TDS) by their employers on their salaries during the year. But what many forget is that in addition to this, they may also be liable to pay advance tax on their non-salary incomes such as interest, dividends from stocks, and capital gains made during the year.
Those who are self-employed – either running a business or working as professionals in the field of law, medicine, and accountancy – too, have to pay advance tax.
Advance tax must be paid in four instalments - by the 15th of June, September, December and March of a financial year. This must be done in a way that 15 percent of the estimated tax amount is paid by June, 45 percent by September, 75 percent by December and 100 percent by March.
But the percentage of penal interest applicable in case of no/inadequate advance tax payment are different.
“In case of the due dates falling on June 15 and September 15, interest applies (on the shortfall amount) only if the advance tax paid by the taxpayer on or before the 15th day of June or the 15th day of September, is less than 12 percent, or 36 percent, respectively, of the tax due on that year’s income,” said Yeeshu Sehgal, head of tax markets at AKM Global, a tax and consulting firm.
However, in case of the December 15 and March 15 due dates, penal interest applies if the advance tax paid is less than 75 percent and 100 percent, respectively, of the estimated tax amount – which are the same percentages as mentioned earlier.
Note that if you are self-employed and have opted for the presumptive taxation scheme, then you need to pay advance tax only in one go in the fourth (January to March) quarter, that is, by the March 15 deadline. Under presumptive taxation (covered under Sections 44AD, 44ADA and 44AE of the Income Tax Act), small businesses and certain specified professionals with gross receipts or annual turnover of up to Rs 2 crore and Rs 50 lakh, respectively, don’t have to maintain books of accounts and instead simply offer 8 percent (for a business)/50 percent (for a professional) of their annual turnover as taxable income.
Explaining why advance tax payment has to be paid only in the last quarter for those opting for presumptive taxation, Chetan Chandak, director at TaxBirbal, a tax firm, said, “It may be difficult for small businessmen and professionals to estimate their gross receipts or annual turnover at the start of the year, making it difficult to estimate their advance tax liability. This is also in line with the spirit of simplified taxation under the presumptive taxation scheme.”
Penal interest rate
What happens if you fail to pay advance tax or the amount paid falls short of what was due? A taxpayer will be penalised with simple interest at the rate of 1 percent per month for short payment/non-payment of advance tax by the due date, for the period till the amount is paid.
The penal interest applies (on the shortfall amount) only if the total advance tax paid is less than 12 percent of the advance tax due by June 15, 36 percent of the due amount by September 15, 75 percent of the due amount by December 15, and 100 percent of the due amount by March 15.
Note that, if you miss the March 15 deadline, you can still pay advance tax until March 31, albeit with one month of interest.
“Any amount paid by way of tax on or before March 31 will be treated as advance tax paid during the financial year. This will attract 1 month of interest for deferment of payment of advance tax as under Section 234C of the Income Tax. But if you wait until July 31 (return filing deadline) to pay this amount, it will be considered a default in payment of advance tax and will attract an additional four months of interest (1 percent per month) under Section 234B,” says Chandak.
For those with substantially higher income, the 1 percent interest can add up to a large amount by July 31. So, don’t wait until the last minute to pay the taxes due on your income for the year, and pay it as advance tax through the year.
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