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You won't believe the amount you are losing by non-payment of advance tax

First up - Apologies for the click-baity title. We've seen so many people pay unnecessary interest due to non-payment of advance tax. So excuse our use of the click-baity title - it's for the greater good.


As the due date for payment of the third instalment of advance tax for FY 2020-21 approaches, it's a good time to visit the provisions of advance tax and who needs to pay.


What's covered in this guide?

1. What is advance tax?

2. Who is liable to pay advance tax?

3. Interest for non-payment

4. Comprehensive Illustration



WHAT IS ADVANCE TAX?

‘Advance Tax’ refers to discharging a part of your estimated total tax liability before the end of the Financial Year (April 1 to March 31).


It is also called the ‘pay-as-you-earn’ scheme where tax is payable in advance by the Assessee within the specified due-dates (mentioned below) if the estimated total tax liability is Rs. 10,000/- or more in a Financial Year.

WHO IS LIABLE TO PAY ADVANCE TAX?


Regular tax-payers:

A tax-payer whose estimated total tax liability is Rs. 10,000/- or more in a Financial Year. This can include:

A Resident Individual Assessee who is a Senior-Citizen, of the age 60 years or more and does not have any Business and/or Professional income, is exempt from payment of Advance Tax.



Instalments of Advance Tax and Due-dates:

Tax-payers under the Presumptive Taxation Scheme:


Opting for the presumptive taxation scheme under Section 44AD/ Section 44ADA? In this case, you can skip the quarterly advance tax payment and pay tax only by March 15.

Instalment of Advance Tax and Due-date:


NOT PAYING ADVANCE TAX? PAY PENAL INTEREST:


If you do not make advance tax payments as per the above due dates, be prepared to pay interest on non-payment.


Interest under Section 234B:


Interest under section 234B is levied in the following two cases:

a. Where an Assessee, who is liable to pay advance tax, fails to pay such tax OR b. Where the advance tax paid by the Assessee is less than 90% of ‘Assessed tax’.


Interest under section 234B is levied on the amount of unpaid / shortfall in payment of advance tax computed as follows:

Amount liable for Interest: Interest under section 234B is levied on the amount of unpaid / shortfall in payment of advance tax computed as follows:


Rate of Interest: Simple Interest is levied at the rate of 1% for every month or for part of a month


Period for the levy of Interest:

Interest is levied from April 1 of the following Financial Year

Illustration:


Mr. Ayush’s total tax liability as determined under the Income-tax Act, 1961 is Rs. 28,40,000/.


He has paid Rs. 10,00,000/- as advance tax by March 9, 2020.

The balance tax of Rs. 18,40,000/- was paid by him on July 31, 2020, while filing his Income Tax Return.


Will he be liable to pay interest under section 234B? If Yes, then how much?


Solution:

In the above case, Mr. Ayush’s assessed total tax liability is Rs. 28,40,000/- and 90% of such assessed tax is Rs. 25,56,000/- [i.e. Rs. 28,40,000/- (x) 90%].


However, Mr. Ayush has deposited only Rs. 10,00,000/-, which is less than 90% of such assessed tax.


Accordingly, he will be liable to pay interest under section 234B computed as under:


Amount liable for Interest:

Rate and Period of Interest:

Simple Interest will be levied at the rate of 1% for every month or for part of a month from April 1 of the following Financial Year till the date of Assessment.


In the present case, Mr. Ayush has paid the outstanding tax on July 31, 2020. Accordingly, Interest will be levied for the period of 4 months (i.e. from April 1, 2020 to July 31, 2020).


Interest Amount: Rs. 18,40,000/- (x) 1% (x) 4months = Rs. 73,600/-.



Galactic Outlook: An additional amount of interest of INR 73,600 can easily be avoided by paying your advance tax on time. Your laziness in not paying advance tax could be costing you your next iPhone.

Interest under Section 234C:


Interest under section 234C is levied, if the advance tax paid in any instalment(s) (as per the specified due-dates mentioned above) is less than the actual proportional tax payable.


Amount liable for Interest: Interest under section 234C is levied on the short paid amount of instalment(s) of advance tax.


Rate of Interest: Simple Interest is levied at the rate of 1% for every month or for part of a month


Period for the levy of Interest:

Interest is levied from due date till date of payment or end of the financial year, whichever is earlier.


Galactic Tip: Interest under section 234C is not leviable in respect of any shortfall in payment of tax due on returned income, where such shortfall is on account of the following:

  1. Capital Gains;

  2. Dividend income

In the above case, payment should be made by 31 March.


This is an extremely useful provision that allows you to pay advance tax only by the end of the financial year.


Too complex? We've prepared a couple of comprehensive examples to explain everything

ILLUSTRATION

Mr. Galactic has the following income during FY 2020-21:


Let's look at 3 scenarios:

  1. Mr. Galactic pays no advance tax

  2. Mr. Galactic pays advance tax by 15 March 2021

  3. Mr. Galactic pays all instalments of advance tax on time

Note: For the purpose of this illustration, we have assumed Mr. Galactic is opting for the old tax regime.

Scenario 1: Mr. Galactic pays no advance tax

Mr. Galactic completely forgot that he had advance tax payable for FY 2020-21. He pays tax and interest on 31 July 2021. Here's how his tax would be calculated.

Interest under 234C:

Total Interest paid: INR 1,73,774.48

Galactic Outlook: Forgetting to pay advance tax can be a costly error. Even though full TDS was deducted on salary, Mr. Galactic ended up paying INR 1,73,774 in interest in the above case. That is an additional burden of about 9%. Why do you want to give the Government free money?

Scenario 2: Mr. Galactic pays advance tax on 31 March 2021

Mr. Galactic didn't know about advance tax. Luckily, he found Galactic Advisors and approached them at the end of March 2021. He pays advance tax due by 31 March 2021:


Mr. Galactic has no tax liability under Section 234B since he paid all taxes due by 31 March 2021.


Interest under 234C:

Total Interest paid: INR 96,968.1


Galactic Outlook: Mr. Galactic did end up saying INR 77,000 in interest. However, we advised Mr. Galactic to pay advance tax on time from next year to avoid unnecessary penal interest.

Mr. Galactic's additional interest burden amounted to approximately 5% in FY 2019-20. At a time when FD rates are hovering around 5%, do you really want to be paying an additional 5% to the Government?


Scenario 3: Mr. Galactic pays all instalments of advance tax on time

Mr. Galactic is a client of Galactic Advisors. As advised by our team of experts, he pays tax diligently according to the due dates. Here's how his tax is calculated:

Total Interest paid: NIL


Galactic Outlook: Mr. Galactic ended up saving INR 1,73,774.48 in interest. Enough money to purchase 17377 packets of chips. Enough to last a lifetime :D

While the above examples are over-simplified, it gives a good idea on the amount of additional interest people end up paying for not knowing the due dates.


Ensure you are paying your advance tax on time - you could end up saving 8-16% per year. At a time when interest rates are at their lowest, why forego such a high amount in payments to the Government.


Need our help? Feel free to contact us.

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