When preparing to file their tax returns, many people often get a shock as their chartered accountant tells them that they owe the government a considerable sum of money as interest for not having paid their “advance tax". Many people have no idea that they are supposed to pay an advance tax. For this financial year, the first date for advance tax will be 15 June.
What is advance tax, you may be asking? The government collects taxes in order to pay for the expenses of carrying out the country’s day to day functions. These expenses are incurred throughout the year. As a result, these taxes need to be collected through the year and not merely at the end when we file our returns. In fact, this is the reason organizations deduct tax at source (TDS) on their employees’ salary income every month.
While organizations typically carry out the responsibility of deducting the right amount from salary income and paying the government on time, the duty to do the same for “non-salary" income falls squarely upon us.
It’s probable that most people have some form of non-salary income. Some examples include bank interest and capital gains.
Bank interest: It is advisable to keep track of one’s bank statements to see how much interest income was earned through the year. These typically appear as 'credit interest' on a bank statement. One also needs to know how much interest has been earned from fixed deposits and from savings accounts. This is important because while the interest earned on a savings account is exempt from tax up to Rs10,000, interest earned on fixed deposits is fully taxable. If you are a senior citizen, up to Rs50,000 is exempt from tax from current fiscal.
Capital gains on the sale of assets: When selling shares of a company or units of a mutual fund, it is recommended to keep track of the statements from the service provider. Apart from helping keep track of gains and losses, they assume significance as they help an investor keep track of whether these were short-term or long-term.
What about businesses and professionals such as lawyers or doctors? In the case of businesses and professionals resident in India, as long as their gross receipts or turnover of businesses is less than Rs2 crore per annum, they are exempted from the mandatory payment of advance tax. They have to pay 100% advance tax by 15 March.
We need to be vigilant for four key dates over the course of the year—15 June, 15 September, 15 December and 15 March—and pay advance tax. Of the total taxes, one needs to pay an “advance" of 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.
For this, one needs to estimate the tax bill on the non-salary income, and then evaluate whether one actually needs to pay something or not. Normally, 15 March is when a payment becomes due so that taxpayers don’t get penalized by the government. This advance tax can be paid via Net banking; one just needs to save the PDF version of the challan that’s generated.
For those unable to pay the full 15% and 45% in the first two instalments, there is a small concession. If an individual pays even 12% and 36% of the total tax payable for the full fiscal by 15 June and 15 September, instead of the full 15% and 45%, then that person would not be liable to pay interest of 1% on the shortfall in advance tax.
However, the real issue in the case of advance tax is that a substantial number of people are simply unable to accurately estimate their income for the coming financial year. What happens if you don’t pay the advance tax on time? Failure to comply can mean a rather hefty interest at the rate of 1% per month. On filing a return, many taxpayers get a shock and wonder what could have been done to prevent this penalty. The only way to avoid paying this interest is to diligently keep track of the four advance tax deadlines and to make sure that you’re on the right side of those percentages at all times.
The do-it-yourself approach is to be diligent, maybe maintain a spreadsheet and estimate your taxes every month to see if what one owes has actually been paid. Additionally, the income tax department has launched an online income tax calculator, which can be freely accessed and used by anyone. This makes it easy for taxpayers to evaluate and assess their advance tax liability.
Another approach is to find a chartered accountant and get her to keep track of this for you. While it might seem cumbersome to exchange e-mails and phone calls throughout the year, it is worth the satisfaction of having saved a substantial sum as interest at the time of filing taxes.
E.R. Ashok Kumar is CEO and co-founder, Scripbox