Why Missing Even One Advance Tax Instalment Can Be A Costly Affair

As the deadline for the first instalment of advance tax approaches, it is important to stay conscientious, as failing to pay just one instalment could lead to a monthly penalty.

Here’s a break down of everything you need to know about advance tax payments.

Simply put, anyone who has an income, where tax is not deducted at the source, is liable to pay advance tax, according to Arvind Rao, chartered accountant and founder of Arvind Rao & Associates.

Advance tax has to be paid if the tax on the income earned exceeds Rs 10,000, after deducting the tax that was already paid at source.

Advance tax is the amount of income tax that should be paid in four quarterly instalments for any external income that is not taxed at the source.

It’s a 'pay-as-you-earn' system that breaks up the tax flow evenly throughout the year, into four quarterly payments.

Rao recommends starting by estimating the income that one earns through means like interest on investment, capital gains, rent received, (or even a lottery won!).

Advance tax needs to be calculated on the estimated amount of income that one makes apart from a salary. If the income estimated changes, then one can adjust the same through instalments through the year.

To understand the system, it’s important to understand the timeline that is followed for payment of advance tax.

Advance tax is paid in four quarterly payments:

Non-payment of advance tax within the deadline, or payment of less than specified amount will result in consequences mentioned in Section 234B of the Income Tax Act 1961.

There will be a penalty interest of 1% per month that is charged on the default amount from the due date till the date of actual payment.

For example, if the tax unpaid in the first instalment was Rs 50,000, then the penalty interest will be calculated at 1% per month for three months until the amount is paid.

In the case of underpayment, that is, if at least 90% of the tax is not paid by March 31, the 1% penalty interest applies to the entire unpaid tax amount.

As income like capital gains is uncertain, there are relaxations that are provided while calculating advance tax for such earnings.

There is a dispensation of Rs 1 lakh for the whole year, where capital gains on sale of equity are not taxable. If income exceeds Rs 1 lakh through the course of the year, then it is liable to tax.

“When capital gains are submitted, we show the time at which we acquired it as well, so the interest only arises in case of default,” explained Rao.

There are both online and offline methods of making advance tax payments.

A person can e-file advance on the Income Tax Department portal online. The payment can be made under the advance tax section.

For the offline method, Challan 280 can be downloaded from the IT Department website and the hard copy can be filled. The filled challan can then be submitted along with the payment to any authorised bank.

Senior citizens who do not have any income from business or profession are exempt from payment of advance tax.

The Presumptive Taxation Scheme, which applies to any business that has a turnover that is less than Rs 2 crore, can make a one-time payment by March 15.

There is also a different timeline in place for the special category of self-employment where the advance tax is paid in three instalments.