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Saturday, September 7, 2013

What is Advance Tax?

What is Advance Tax?
It is obligatory to pay advance tax in every case where the estimated tax payable (after taking into account TDS) is Rs.5000.00 or more
How to pay Advance Tax?
*     If Assessee first calculates his estimated total income and then calculates the tax payable thereon
*     From tax so calculated - deduct TDS which he estimates will be deducted at source
*     Balance should be paid in three installments as described herein
When to pay advance tax?
            Due Date                                 Amount To Be Paid

            15th September                        30% of tax

            15th December                         60% of tax

            15th March                              100% of tax

What if you don’t pay advance tax?
Well, there are penalties in the form of interest payments to the taxman. But before worrying about penalties, find out if you are liable to pay advance tax. You don't have to pay tax in advance if your tax liability is Rs 5,000 or less after reducing the tax deducted at source (TDS) from the total tax payable.
Thus, if you are a male below 65 years of age and expect to earn Rs 2 lakh this year, an amount on which the tax payable is Rs 15,300, and the tax deducted at source is Rs 10,301, then the balance payable is Rs 4,999. Since this amount is less than Rs 5,000, you won’t have to pay any advance tax during the year.

However, in cases where your tax liability is more than Rs 5,000 after deducting the TDS from your gross tax liability, you will have to pay tax in three installments. Let’s take a look at the installments and the percentage of tax payable:

Advance tax installments (Section 211)

In the case of individuals, the advance tax is payable in three installments:
Due date Amount of tax
First installment by September 15 At least 30 per cent of total amount
Second installment by December 15 At least 60 per cent of total amount, less amount paid in first installment
Third installment by March 15 100 per cent (total amount), less amount paid in the first two installments

 Note: The above advance tax liability should be calculated on the basis of the income that will ultimately be reflected in the assessee’s returns.  Also, do check the applicable tax/tax rates in your case. They might differ from the example given above.

What is the Penal Interest for deferment of advance tax?
Interest for deferment of advance tax

If you don’t pay an advance tax instalment in full, you have to pay interest at 1 per cent a month for three months on the amount that falls short of the required payment. However, in the case of default on the last instalment (March 15), the penal interest of 1 per cent is chargeable for only a month.

Let’s illustrate this with an example. Let’s say you are an individual taxpayer and are liable to pay Rs 10,000 by way of advance tax. Suppose you pay Rs 9,500 in three installments (Rs 3,000 on September 14, Rs 2,000 on December 15, and Rs 4,500 on March 15), would you have kept to your payment schedule?

There will have been  no default in respect of the first instalment (Rs 3,000, which is 30 per cent of Rs 10,000).
The second instalment amount should, however, have been Rs 3,000 (60 per cent of Rs 10,000, less Rs 3,000 paid in the first installment). Hence, the shortfall is Rs 1,000, on which the interest payable is Rs 30 (1 per cent of Rs 1,000 for three months).
Since the third instalment is Rs 4,500, there will have been a shortfall of Rs 500, on which the interest charged would be Rs 5 (1 per cent of Rs 500 for a month).
Thus, you end up with a penal interest of Rs 35 for the year. If in the last month, that is March, you delay payment of the last instalment by even a day, you will have to pay interest on the entire balance of Rs 5,000.

This has reference to Section 234C of Income Tax Act.
What is the Penal interest for non- or short-payment of advance tax?
If you don’t pay advance tax at all or if the aggregate paid by March 31 is less than 90 per cent of the total tax payable, you will have to pay an interest of 1per cent per month on the deficit amount from April 1 of the following year till the date you file your return.

This has reference to Section 234B of Income Tax Act.
What is Self-Assessment?
Self-Assessment Tax:
*     At the time of filing the return, assessee finds any tax that is payable by him after taking into account TDS, advance tax if any, the balance tax that become payable is known as self assessment tax
*     Self-assessment tax should be paid before filing the return of income

What is Demand Tax ?
Demand Tax:
*     While making assessment, assessing officer may re-compute taxable income higher than the total income declared by the assessee. Tax on such increased income is known as demand income
*     Demand tax should be paid within 30 days of receipt of the demand notice