Advance Tax- “Pay as you Earn Scheme”

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Benjamin Franklin once said, “In this world nothing is certain but death and taxes”. So Why is that, When is that, What is that, Who is that and How. Okay, here’s the answer to this- Advance Tax. This article will give you a good view of it.

Section 207

Accordingly, as the name implies, advance tax is the tax that one pays in advance. It is therefore the provisions of Section 207 of the Income Tax Act, that states that every Assessee shall estimate his Income and Tax Liability for any previous year and Income Tax so estimated shall be paid in advance in accordance with the manner given u/s 211 of the Income Tax Act,1961. It makes it obligatory for every individual, self-employed professional, businessman and corporate to pay Advance Tax, on any income on which TDS(Tax Deducted at Source) is not paid.

Who will pay Advance Tax- Section 208

A Person shall be liable to pay advance tax only if Tax Liability exceeds Rs. 10,000 i.e. a person shall be exempt from payment of Advance Tax if Tax Liability does not exceed Rs. 10,000.00. The Education Cess and Secondary Higher Education cess shall also be considered for the purpose of calculating the Tax Liability.

Both individuals, as well as Corporate Tax Payers, need to pay this tax. This applies to individuals particularly when they have income other than income from salary.  If the sole income of an individual is his salary, then you need not pay advance tax as the employer deducts it at source, known as TDS (tax deducted at source). But when there is revenue from other sources such as: interest earned (on saving bank account), capital gains, lottery wins, from house property or from business, then you needs to pay advance tax on all income after adjusting expenses or losses.

Who doesn’t have to pay Advance Tax?

Advance Tax is NOT applicable when;

  1. A taxpayer opts for the scheme of computing business income under Section 44AD or u/s 44ADA i.e on Presumptive Taxation Scheme for business or Profession,
  2. A senior citizen (resident individual who is 60 years or more) who does not have any income from Business & Profession.

 

How is advance Tax Calculated?

Advance tax is based on income that may be received by an individual during the year; in that sense it is estimated income. The tax is determined using the rates applicable in that financial year. Also if, the real income rose after the payment of first installment of tax on the estimated income, which was increased due to some shares/mutual funds that were sold, then in the next payment we will have to change our revenue and pay the difference accordingly.

The steps for calculating advance tax are described below:

  • Determine the Income: Determine the income you earn other than your salary. It is necessary to include any existing income which could be paid out later on.
  • Minus the Expenses: Deduct the expenses from income. You should exclude work-related expenses such as office leases, accommodation expense, internet and phone charges.
  • Compute the Net Total Income: Add other income that is received in the form of rent, interest income, etc. Deduct the TDS from the salaried income.
  • Compute Advance Tax: On the above net total income, estimate Advance Tax.If the tax due is more than Rs.10,000 then you would have to pay advance tax.

When should advance tax be paid?

The dates and percentages for both individuals and corporate taxpayers are listed below:

Due Date Advance Tax Payable
On or before 15th June 15% of advance tax
On or before 15th September 45% of advance tax
On or before 15th December 75% of advance tax
On or before 15th March 100% of advance tax

Points to Note

  1. Tax payers who have opted for Presumptive taxation scheme under Section 44AD or 44ADA have to pay the whole of their advance tax liability in one installment on or before 15 March.
  2. When the last day for payment of advance tax happens to be a bank holiday, it can be paid on the next day without any interest charges.
  3. Pay Advance tax either electronically or physically using Challan no./ ITNS 280 by visiting https://www.tin-nsdl.com or following the link given on the Income Tax website. Note that taxpayer’s PAN is mandatory in the Challan and quoting of the wrong PAN may attract a penalty of  Rs,10,000/-.
  4. After the tax is paid, it will get reflected on the taxpayer’s Form 26AS within 3-4 working days of making the payment. Check Form 26AS for confirmation of details.

What if advance tax is not paid?

When an individual is liable to pay advance tax and if he does not pay the same or less than the stipulated tax, he will be penalized and would have to pay extra (interest) in compliance with Sections 234B and 234C. However it is to be noted that Tax paid till 31st March of the financial year shall be treated as Advance tax.

Under Section 234B, when the cumulative amount of advance tax charged in accordance together with the amount of TDS is less than 90% of the overall tax obligation then interest is calculated at 1% per month or part of a month from 1st April of Assessment Year to the date of determination of income u/s 143(1) or date of regular assessment if such assessment is made.

Under Section 234C, for shortfall/ failure to pay advance tax or Deferment of advance interest is levied under this section. There are three components; for the first installment, the shortfall is calculated for 3 months @1% p.m. Similarly, for second and third installment and for the last and final installment it is calculated for 1 month only @1%.

Under Section 273, if advance tax payable by assessee is untrue and the Assessing Officer had reasons to believe or has failed to furnish a statement of the advance tax payable by him, then AO may direct such person to pay by way of penalty which shall not be less than ten per cent but shall not exceed one and a half times the amount by which the tax actually paid during the financial year immediately preceding the assessment year falls short of

  • seventy-five per cent of the assessed tax or
  • the amount which would have been payable by way of advance tax if the assessee had furnished a correct and complete statement

whichever is less.

Why Pay Advance Tax?

Advance tax is one of the Government’s most effective tools to collect tax from the assessee all over India. This prepaid form of tax is structured in such a way as to make an assessee pay Government tax in a ‘Pay as You Earn Scheme’. This specifically aims to reduce the last moment’s burden for an assessee to pay tax obligation that can be due to either lack of time or resources.

Amendments due to Covid-19

No change in timeline for payment of tax, however for delay of deposit of Advance Tax, reduced interest rate 9% per annum or say, 0.75% per month  thereof would be applicable instead of 12% per annum or say, 1% at present for payment of all taxes falling between 20th March 2020 to 30thJune 2020. Due Date of Last Installment is 15th March which can be paid upto 31st march with one month of reduced Interest Rate.

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