The final installment of advance tax for the year is approaching, due on March 15, 2024. As a taxpayer, you’re required to pay advance tax on all your income sources, including capital gains from selling shares, mutual funds, interest earned on fixed deposits, and savings accounts.
According to Section 208 of the Income Tax Act, you must pay advance tax if your tax liabilities for the financial year exceed Rs. 10,000. However, if you’re a senior citizen aged 60 or above and your income doesn’t include business or professional income, you’re exempt from advance tax payment.
Before the financial year 2008-09, the limit for advance tax payment was Rs. 5,000. Since then, it has been raised to Rs. 10,000.
Refer to the chart below for the due dates of advance tax payments:
| Installment | Due Date | Percentage of Estimated Tax Payable |
| 1st | June 15 | 15% |
| 2nd | September 15 | 45% |
| 3rd | December 15 | 75% |
| 4th | March 15 | 100% |
It’s important to understand that taxpayers who declare their business income under the presumptive taxation scheme, opting for sections 44AD and 44ADA, are only required to pay their entire advance tax on the fourth installment.
Many employees mistakenly believe that because their employer deducts taxes, they don’t need to pay additional taxes such as advance tax to the government. However, if they have additional sources of income that they don’t disclose to their employer, the employer wouldn’t be aware of it to deduct taxes accordingly. When filing their income tax return (ITR), if their chartered accountant advises them to pay additional taxes due to undisclosed income to the emlpoyer, they may incur interest on late payment of advance taxes.
Let’s discuss some common sources of income for taxpayers on which advance tax is paid:
Interest income from saving bank:
Interest from savings accounts is typically credited by banks at the end of each quarter. Employees who maintain a substantial balance in their savings accounts earn significant interest. Since banks don’t deduct Tax Deducted at Source (TDS) on savings account interest, employees in the 30% tax bracket are liable to pay tax on this interest. However, they can avail of deductions under Section 80TTA up to Rs. 10,000.
For Non-Resident Indians (NRIs), banks deduct TDS at a rate of 30% plus a cess of 4%, making the total rate 31.20%. Consequently, residents are required to pay advance tax on savings account interest. Conversely, NRIs, already subject to the maximum tax rate of 30%, need not pay advance tax unless their income exceeds Rs. 50 lakh and surcharge is applicable.
Salaried employees switching Job form one employer to another:
Switching jobs is a practical aspect that many employees overlook. When changing employers, you have the option to declare your salary from the previous employer to the current one, but this is often neglected. A common question arises regarding income tax liability when taxes are deducted by both employers.
Let’s clarify the situation and address the challenges faced when filing income tax returns, especially when the chartered accountant asks for additional tax payments due to changes in employers. Typically, employees declare deductions under various sections like 80C, 80D, 80E, and 80CCD to the previous employer at the beginning of the year. The previous employer then calculates the income tax liability after considering these deductions. Similarly, when switching jobs, employees provide the same deductions to the new employer. However, deductions under these sections are only eligible up to a certain limit, yet employees avail of them twice, resulting in less TDS being deducted by both the previous and current employers.
As a result, the employee ends up paying less TDS initially. However, when filing income tax returns and combining income from both employers, additional liabilities arise because deductions can only be claimed once. If the employee falls into the 30% tax bracket, this can lead to significant income tax liabilities.
These are common issues faced by employees who switch jobs during the year, especially those unfamiliar with income tax provisions and facing such issues for the first time. While changing jobs is essential for future growth and seeking advanced opportunities, compliance with income tax law is equally crucial and should not be overlooked. It’s important to pay advance tax accordingly.
Income from Capital Gain
Similar to interest income, taxpayers often overlook advance tax obligations on capital gains, whether short-term or long-term. Advance tax is computed according to the rates specified in the Income Tax Act. Presently, the tax rate for short-term capital gains is 15%, while it’s 10% for long-term capital gains without indexation and 20% with indexation. However, you can claim a concession of Rs. 1 lakh on long-term capital gains on which tax is not paid. Failure to account for these incomes and pay advance tax on them is a common oversight.
NRIs having income in India:
Non-Resident Indians (NRIs) earning in India or deriving income from any source in India are obligated to pay income tax and file income tax returns in India. Additionally, they are liable to pay advance tax in India.
Banks typically deduct Tax Deducted at Source (TDS) on interest from savings accounts and fixed deposits at the maximum applicable rate for NRIs. When filing their income tax returns, NRIs can claim tax credits for the TDS deducted by the bank. If their income falls below the specified limit, they can claim a refund for the TDS deducted in their Income Tax Return (ITR).
However, for other sources of income apart from savings interest and fixed deposit interest, NRIs must deposit advance tax on an installment basis as specified. If professional assistance is required, NRIs can seek help from any chartered accountant specializing in NRI taxation matters.
Taxpayer Opting presumptive taxation scheme under section 44AD and 44ADA.
Yes, taxpayers engaged in business or profession and opting for presumptive taxation schemes typically do not pay advance tax. Their tax liability is determined at the time of filing their income tax returns when they submit all the necessary documents to their chartered accountants’ office.
The government has provided relief to individuals opting for presumptive taxation schemes under sections 44AD and 44ADA. They can pay advance tax in a lump sum in the fourth installment, eliminating the need to pay the first, second, and third installments. Only the tax liability for the entire year needs to be settled in a single payment during the fourth installment.
However, many taxpayers under presumptive taxation schemes fail to take advantage of this benefit. They often delay paying advance tax and settle their dues at the time of filing their income tax returns.
This examples highlights just few scenarios where advance tax is overlooked, but there are various other instances where taxpayers neglect to pay advance tax despite incurring interest penalties.
What happens if you fail to pay advance tax?
When advance tax is not paid on time, simple interest at the rate of 1% per month or part of the month is charged under sections 234B and 234C. While these sections differ, they both address non-payment or late payment of advance tax. Calculating the interest can be complex, so it’s advisable to seek professional assistance, as disputes over interest payments can arise.
It’s important to note that the self-assessment tax paid under section 140A and the TDS deducted should be considered when calculating the advance tax liability.
