top of page
Search
  • Galactic Advisors

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

Updated: Jun 4, 2021

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/-.