December 15 was the deadline for payment of 75 per cent of the total Advance Tax for the financial year 2022-23.
Advance tax is merely income tax paid in advance (as per specified instalments) instead of lump sum payment at the year end. The liability to pay advance tax arises if one has a yearly tax liability of more than Rs 10,000. Advance tax is required to be paid in four quarterly instalments, and in specified percentage.
But now that the deadline for submitting advance tax is over, one will also have to pay interest under Section 234C of the Income -tax Act, 1961. It specifies that the taxpayer, who is in default, is liable to pay interest at 1 per cent per month or part of the month for the period of default.
How Much Penalty Interest To Pay?
This period of default is dependent upon the specific instalment i.e. first, second, third or fourth. The period of default is three months in case of shortfall in payment of first, second and third instalment, but for the fourth instalment , (March 15, 2023), it is one month.
If one does not pay the advance tax amount in respect to specified percentages, then he will be liable to penal interest under section 234B (payment in default of advance tax) and section 234C (deferment of payment of advance tax) of the Income Tax Act, 1961.
Naveen Wadhwa, DGM, Taxmann, a Delhi based book publishing company, Interest under section 234B shall be levied at the rate of 1 per cent per month or part thereof if the assessee has the liability to pay the advance tax but he fails to pay the same or the amount paid as advance tax is less than 90 per cent of the 'assessed tax'. "If the amount of advance tax paid during the year is more than 90 per cent of the assessed tax, the interest under this provision (234B) shall not be charged," Wadhwa further added.
Says Wadhwa, interest under section 234C shall be levied if the assessee has the liability to pay the advance tax but he fails to pay the same or the amount paid in each instalment is less than the amount that he should have paid in such instalments.
So simple interest shall be levied at the rate of 1 per cent per month or part of thereof, subject to certain conditional limits which are given below:
- Advance tax paid on or before June 15 (1st instalment) is less than 12 per cent of the assessed tax.
- Advance Tax paid on or before September 15 (2nd instalment) is less than 36 per cent of the assessed tax.
- Advance Tax paid on or before December 15 (3rd instalment) is less than 75 per cent of the assessed tax.
- Advance Tax paid on or before March 15 (4th instalment) is less than 100 per cent of the assessed tax.
For instance, let’s suppose, someone has a tax liability of Rs 5 lakh, which has been computed by taking into account the tax deducted at source, tax collected at source, deductions, and then calculating the total tax liability.
The break-up of advance tax due by June, September, December and March will be as follows: Rs 75,000, Rs 1.5 lakh, Rs 1.5 lakh, and Rs 1.25 lakh in the ratio of 15 per cent, 30 per cent, 30 per cent and 25 per cent, respectively.
So by June 15, he/she should have paid Rs 75,000 (15 per cent of Rs 5 lakh). If the person has missed that and wishes to pay it along with the advance tax instalment due by September 15 (second instalment), then he/she will also have to pay Rs 2,250 as interest (3 per cent).
Hence on September 15, he/she will be paying Rs 2.25 lakh (45 per cent of Rs 5 lakh) along with an interest of Rs 2,250.
Let’s suppose another individual with the same tax liability of Rs 5 lakh paid the advance tax on time in June and September, but missed the December 15 deadline.
In essence, he/she paid the December 15 advance tax due directly on March 31, 2023 along with the last instalment of advance tax. So, he/she will have to pay interest of Rs 4,500 (3 per cent of Rs 1.5 lakh).
An important aspect in advance tax calculation is that even if tax deducted at source (TDS ) is being deducted by one’s employer, then too, incidence of advance tax payment arises, in some instances.
"We need to estimate our income for first nine months of the financial year and work out estimated tax on same. Reduce prepaid taxes like TDS etc and balance is net tax payable on this estimated income. We need to pay 75 per cent of this tax as advance tax by December 15. It will save interest to the extend of 1 per cent per month on this tax liability. Further, as we are paying taxes as we earn, it will help us to mange cash flow better. One hidden benefit of advance tax is that we get opportunity to analyse our transactions and it may be having many business benefits also. If we over pay in one instalment, we can take credit for it in next instalment," said Sujit Bangar, founder, TaxBuddy.com, a tax filing assistance company.
Abhishek Y. Bhavsar, an Ahmedabad-based chartered accountant, says that it is always a good practice if the taxpayer promptly evaluates his/her the taxable income, (before each instalment due date as mentioned), which shall be earned during the current financial year.
“It is pertinent to note that late deposit or non-deposit of advance tax instalment, before its respective due date, leads to payment of interest under relevant sections, and the same cannot be waived off in any circumstance, as also the same cannot be claimed against the income earned by the taxpayer,” Bhavsar adds.
According to Sandeep Agrawal, director and co-founder, Teamlease Regtech, a Maharashtra based compliance management software company, "I believe that the existing income tax system is not falling short but for sure the same can be further strengthened. The Regulator can consider strategy adopted by GST department in terms of the constant reminders / escalations to the assessee via emails and messages. This practice at least reminds the people for timely compliances. Although, all the Individuals / businesses are not required to pay advance Tax, still sending reminder emails / messages to everyone, provide a proactive intimation to the relevant assessee for the compliance requirement."
How Can One Correctly Estimate Income?
To start with, one should first refer to the existing tax rates and the applicable provisions in force in the respective financial year. Then, after getting the income computed, one should check how much tax they owe, and accordingly calculate their tax liability.
After this, they should check the TDS and the TCS amount. After adjusting their tax liability for both TDS, TCS and any current year and previous advance tax, they should check the specified table for any balance advance tax due.
The current financial year is 2022-23, and the assessment year for the same is 2023-24, so one should select AY 2023-24 while depositing the advance tax amount.