Everything you wanted to know about advance tax and the penalties under it
Do you file your income tax only at the end of the financial year? This method is common among many taxpayers as it is a one-time procedure and allows you to relax for the rest of the year. What you may fail to realise is that this system puts a lot of stress on the government as all payments are received only at the end of the year.
As the name implies, an advance tax is a tax that you are liable to pay in advance of your generated income. This is also called the ‘pay-as-you-earn’ tax since it is deducted after receiving income during the year and not at the end of it. Advance tax is applicable only if your annual tax liability exceeds INR 10,000.
Who Needs to Pay Advance Tax?
Advance tax is filed on your income from sources other than your salary. If you are a salaried employee whose employer deducts TDS regularly, advance tax will not be applicable to you. TDS (Tax Deducted at Source), as the name suggests, is a system where tax is collected as and when your income is generated.
If you are self-employed or are part of a business, you are required to pay advance tax. Companies and corporates are subject to the same.
Interest on fixed deposits and savings bank deposits, rental income, capital gains, and other sources of income qualify for filing advance tax. Companies like Bajaj Finserv offer fixed deposits with zero TDS on interest payments up to INR 5000, helping you save a considerable amount of your income.
Senior citizens are exempted from paying this tax if they do not have any business income.
Advance Tax Filing Procedures
Defaulting on your advance tax payment will incur interest according to Section 234 of the Income Tax Act. You can pay at any of the 926 branches of banks authorised by the IT department (State Bank of India, HDFC Bank, Syndicate Bank, Axis Bank, etc.) by filling out a simple advance tax challan—ITNS 280. You can also pay it online via the IT department or National Securities Depository.
Due Dates to Pay Advance Tax
Advance tax has to be paid thrice a year for individuals. The payment recurrence for companies, however, is four times a year. Let us take a brief look at advance tax due dates.
For Entrepreneurs and the Self-employed
- Minimum 30% of liability on or before 15th September
- Minimum 60% of liability on or before 15th December
- 100% of liability on or before 15th March
This means that if you are self-employed or part of a business, you need to pay advance tax in instalments of 30%, 30%, and 40% on 15th September, December, and March respectively. As per this calculation, if your liability is INR 1,00,000 for the year then you should pay INR 30,000 by 15th September, INR 30,000 by 15th December, and INR 40,000 by 15th March.
- Minimum 15% of liability on or before 15th June.
- Minimum 45% of liability on or before 15th September.
- Minimum 75% of liability on or before 15th December.
- 100% of liability on or before 15th March.
By paying advance tax on time, the government is ensured a constant flow of income throughout the year. This income can be applied to development projects that will, in turn, benefit you.
Missing the Deadline
Failure to completely pay the specified amount of liability by the first deadline will incur interest. Online portfolio management services by Bajaj Finserv help you keep track of your investments in real-time to make sure you do not default on payments.
For Self-employed and Businesspersons
- If advance tax paid in the first 2 instalments is less than specified, 1% simple interest is charged on the deficit amount for 3 months.
- If the advance tax paid is less than 90% of tax payable, 1% simple interest is charged per month.
- If advance tax paid in the first 3 instalments is less than specified, 1% simple interest is charged on the deficit amount for 3 months.
- If the advance tax paid is less than 90% of tax payable by the 4th instalment, 1% simple interest is charged per month from 1st April.
In case the tax paid is more than the liability, you are entitled to a refund. This refund carries an interest rate of 6% if the excess is more than 10% of tax liability.
Paying tax at the end of the year may seem like a smart option, but paying penalties on late or non-payment of advance tax has its own problems. Understand the significance of advance tax, analyse advance tax rates, and recognise its role in easing your financial burdens as well as its importance to the economic health of the country.