Advance tax: Know the implications of defaulting
Premium- Any tax paid till 31 March will be treated as advance tax. The advance tax can be paid through both online and offline modes using tax payment challan
As the financial year 2021-22 is coming to an end, it is time for the taxpayers to evaluate if any advance tax liability is due. Any individual who has taxable income is liable to pay income tax on his/ her total income earned during a particular financial year. The income tax is calculated as per the provisions of the Income Tax Act, 1961 (Act) and is directly paid to the Central Government through different modes i.e., tax deducted at source (TDS), tax collected at source (TCS), advance tax and self-assessment tax.
For salaried individuals, the employer withholds tax on the salary income and remits this tax to the government. Banks also usually withhold tax on interest payments on fixed deposits. However, if there are other sources of income on which no TDS has been deducted or if the tax deducted is not sufficient to cover the tax liability on the income, there is a need to discharge the tax liability (if more than ₹10,000) by way of advance tax.
Let us understand the calculation of advance tax with the help of an example:
Nikita, a salaried professional, earns taxable salary income of ₹30 lakh and interest income of ₹5 lakh, during the financial year 2021-22. Nikita’s employer has deducted TDS of ₹7 lakh on salary and bank has deducted tax of ₹50,000 on the interest income. She is also eligible for Chapter VI-A deduction of ₹1.5 lakh.
This is how advance tax is to be calculated:
Particulars Amount (in Rs)
Income from salary - ₹30 lakh
Income from other sources - ₹5 lakh
Gross total income - ₹35 lakh
Less: Deductions under Chapter VI-A of the Act (1,50,000)
Total income after deduction - ₹33.5 lakh
Tax on total income {(including cess) (A)} - ₹8.5 lakh
Less: TDS deducted by employer (B) - ₹7 lakh
Less: TDS deducted by bank (C) - ₹50,000
Advance tax payable (A-B-C) - ₹1 lakh
In the above case, Nikita is liable to pay advance tax of ₹1 lakh, which is payable in 4 installments as given below:
On or before 15 June, 15% of advance tax is payable - ₹15,030
On or before 15 September, 45% of advance tax is payable - ₹45,090
On or before 15 December, 75% of advance tax payable - ₹75,150
On or before 15 March, the entire ₹1 lakh tax is to be paid
It is interesting to note that any tax paid till 31 March will be treated as advance tax. The advance tax can be paid through both online and offline modes using tax payment challans (challan number 280). Once the advance tax is paid, it will be reflected in Form 26AS within 3-4 working days, which can be reported in the income tax return at the time of filing ITR.
If an individual fails to pay the advance tax liability or misses any of the installments on or before the specified due dates or there is a shortfall in payment, the due amount will attract interest of 3% per quarter for the first 3 quarters and 1% for the final quarter. An individual will also be liable to pay additional interest from April (after the end of financial year) at the rate of 1% per month on the shortfall of advance tax, in case the advance tax paid by such an individual is less than 90% of the total tax payable.
In some cases, advance tax does not apply, such as in the case of a resident senior citizen (individual aged 60 years or more) who does not have any income from business/ profession. Also, as it is practically not possible to estimate the income from capital gains and dividend income in advance, therefore in such cases, if any such income arises after the due date of any installment, then the tax calculated on such income shall be paid in remaining installments of advance tax which are due.
As the due date, i.e 15 March 2022 for payment of the final installment of advance for the financial year 2021-22 is fast approaching, it is recommended to evaluate your advance tax liability and pay the same on time, even if payments for prior installments have been missed, to avoid further interest implications.
(Rama Karmakar, Tax Partner – People Advisory Services at EY India.)
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