Advance tax, also referred to as "pay-as-you-earn" tax, is a system where taxpayers make payments towards their estimated tax liability in instalments instead of paying the full amount at the end of the fiscal year. This method helps in the dispersion of the tax collection throughout the year and aids in reducing the burden of a lump sum payment at the end of the fiscal period. Individuals and businesses with a certain level of income are required to pay advance tax if their tax liability exceeds a specific threshold after accounting for Tax Deducted at Source (TDS) or Tax Collected at Source (TCS). Typically, this applies to salaried employees, freelancers, and businesses, among others. The rules, thresholds, and due dates for advance tax payments can vary by country and are governed by the respective tax laws. Failure to comply with advance tax requirements can result in penalties and interest charges.
Table of Contents
- What is Advance Tax in Income Tax?
- Due Dates for Payment of Advance Tax
- What if someone doesn’t pay it by 15th March?
- Conclusion
Advance tax stands as the choreographer, guiding taxpayers through the rhythmic steps of timely contributions of income tax. It’s not just a matter of meeting legal obligations but a proactive stance against the discordant notes of interest costs. Let us see what differences would arise in interest costs and what significant repercussions one might face in case of not paying or short-paying the amount. Also, let us learn how taxpayers can save interest even on paying advance tax after 15th March of financial year.
1. What is Advance Tax in Income Tax?
It is a system of staggered payment of income tax by taxpayers throughout the financial year, as opposed to paying the entire tax liability after the end of the year.
In India, advance tax applies to all assessees with a tax liability of Rs. 10,000 or above, except to a resident senior citizen with age ≥ 60 years having no income under the head profits/gains from business and profession.
2. Due Dates for Payment of Advance Tax
For the relevant previous year | Amount payable, not less than as a percentage of total advance tax payable | ||
Quarters | Instalment, on or before | ||
| (a) | For assessees other than those opting for presumptive taxation u/s 44AD and 44ADA | ||
April to June | 15th June | 15% | |
July to September | 15th September | 45% | |
October to December | 15th December | 75% | |
January to March | 15th March | 100% | |
| (b) | For assessees opting for presumptive taxation u/s 44AD and 44ADA | ||
| Whole Year | 15th March | 100% | |
3. What if someone doesn’t pay it by 15th March?
The amount paid after 15th March but on or before 31st March shall also be treated as Advance Tax paid during the financial year and only interest under Sections 234B & 234C for those few days would be levied.
Let us take an example
Mr Yash has a net tax payable of Rs. 2,60,000 for A.Y. 24-25 after all the deductions and TDS/TCS credits. Further, he has opted out of the default tax regime and paid the following advance tax installments and will file his return of income with the remaining tax liability on 31st July 2024.
| Installment paid | Amount (In Rs.) |
| 11th June 2023 | 30,000 |
| 8th September 2023 | 40,000 |
| 14th December 2023 | 35,000 |
| 5th March 2024 | 45,000 |
| 25th March 2024 | 20,000 |
| Total | 1,70,000 |
Let’s understand the final tax amount payable by Mr Yash
Interest under Section 234B
Section 234B provides for a levy of interest on a default in payment of the advance tax. Interest under this section is levied in the following two cases:
- When the taxpayer has failed to pay advance tax though he is liable to pay; or
- Where the tax paid by the taxpayer is less than 90% of the assessed tax
Rate of Interest: The taxpayer is liable to pay simple interest at 1% per month or part of a month for a default in payment of the advance tax.
Amount: Interest is levied on the amount of unpaid advance tax. If there is a shortfall in the payment, then an interest is levied on the amount by which tax is short-paid which is the assessed tax less any advance tax paid.
Period of Interest: Interest under section 234B is levied from the first day of the assessment year, i.e., from 1st April up to the date of payment of self-assessment tax, computed on the amount of unpaid/short advance tax.
Continuing Mr Yash’s example,
| Particulars | Amount in Rs. |
| Assessed Tax [A] | 2,60,000 |
| Total Advance Tax Paid [B] | 1,70,000 |
| Shortfall [C] = [A]-[B] | 90,000 |
| Number of months from 1/4/24 to 31/7/2024 [D] | 4 |
| Rate of Simple Interest per month [E] | 1% |
| Interest Amount = [C]*[D]*[E] | 3,600 |
Interest under Section 234C
Interest under section 234C is levied, if the advance tax paid in any installment (s) is less than the required amount @ 1% per month or part of a month for short payment/non-payment of individual installment (s).
Period: It is levied for a period of 3 months, in case of a shortfall in payment of 1st, 2nd, and 3rd installments and for 1 month, in case of a shortfall in payment of last installment.
Continuing Mr Yash’s example,
| Instalment, on or before | Required % of Assessed Tax | Required Amount [B] = 2,60,000*[A] | Actual Paid | Cumulative Amount [C] | Shortfall [D] = [B] – [C] | Interest [D]*1%*Months |
| 15th June | 15% | 39,000 | 30,000 | 30,000 | 9,000 | 270 |
| 15th Sep | 45% | 1,17,000 | 40,000 | 70,000 | 47,000 | 1,410 |
| 15th Dec | 75% | 1,95,000 | 35,000 | 1,05,000 | 90,000 | 2,700 |
| 15th Mar | 100% | 2,60,000 | 45,000 | 1,50,000 | 1,10,000 | 1,100 |
| 5,480 |
Calculation of the Total Tax Payable – Scenario Analysis
| Particulars | Mr Yash’s case | If Advance tax was paid properly | If no Advance tax was paid |
| Net Tax Liability [A] | 2,60,000 | 2,60,000 | 2,60,000 |
| Interest u/s 234B [B] | 3,600 | 0 | 10,400 |
| Interest u/s 234C [C] | 5,480 | 0 | 13,130 |
| Total Interest Payable [D] = [B] + [C] | 9,080 | 0 | 23,530 |
| Total Tax Liability [A] + [D] | 2,69,080 | 2,60,000 | 2,83,530 |
The significance of tax payment can be seen from the given calculation where interest of Rs. 9,080 is levied in case of short payment and interest of Rs. 23,530 is levied in case of no payment.
4. Conclusion
Failure to pay tax or underestimating the liability may attract penalties and interest charges, so it’s essential for taxpayers to comply with the requirements to avoid such consequences. Its timely payment orchestrates a harmonious symphony of fiscal responsibility, ensuring the smooth flow of revenue streams into the state’s coffers.
The post What is Advance Tax? – Concept | Due Dates | Interest Penalties appeared first on Taxmann Blog.
