The Income Tax (I-T) Act prescribes payment of advance tax if the tax liability (after tax deducted at source, or TDS) on the estimated income for the financial year (FY) exceeds ₹10,000.
The advance tax must be paid by the taxpayer in four instalments—at least 15% of the advance tax liability by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.
The amount payable in each instalment is the due amount minus the amount paid until the previous instalments. (see chart for an example on the advance tax instalments due and that paid for an estimated income of ₹30 lakh per annum of a freelancer).
However, there are instances when income estimates can go wrong. In such cases, necessary adjustments to the advance tax payments—shortfall or the extra payment —can be made in the remaining instalments.
“The government expects that taxpayers would estimate their income tax liability on a periodic basis during the relevant financial year and pay the income tax liability in advance, applying the concept of ‘pay as you earn’,” said Shailesh Kumar, partner, Nangia & Co LLP.
While this is a fair ask, what bothers most taxpayers is the levy of interest, on any unexpected income earned in the last quarter, from the beginning of the financial year.
In the case of unexpected income, the advance tax instalment dues also get revised. If this is not paid,interest at the rate of 1% per month is charged for each quarter on the differential amount. This is as per Section 234C of the I-T Act.
Note that the interest under section 234C doesn’t arise if the shortfall in payment of advance tax is due to failure to estimate income from capital gains or the income generated from winning lotteries, crossword puzzles, or dividend income.
The interest under section 234C is applicable only till 31 March of an FY.
After 31 March, and till the date of payment of the differential amount of tax, interest under section 234B kicks in.
Interest under Sec 234B is also calculated at the rate of 1% per month and is payable on the shortfall after the end of the financial year (from 1 April of next the FY) till the date of payment/filing return. This interest comes into the picture only if the total advance tax paid is less than 90% of the tax liability at the end of the FY.
Difficulty in estimating
Many experts acknowledge that estimating income accurately is a difficult task for a common man.
Aarti Raote, partner from Deloitte India, believes that estimating accrued income from common sources like fixed deposits is difficult for the ordinary taxpayer.
“The details of income and taxes are available in the Form 26AS. However, the 26AS for the last quarter is updated only post-May. Hence, determining the income and taxes accurately at least for the last quarter is a challenge for many,” she added.
“Taxpayers with professional income have the toughest task in estimating their income as the books of accounts for them would be available only after 31 March after booking all expenses,” said Akhil Chandna, partner, Grant Thornton Bharat.
To provide some relief to taxpayers, some chartered accountants say that the due date for paying the last instalment of advance tax has to be deferred from 15 March to 15 April of the next FY.
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