As the deadline to pay the second instalment of Advance Tax is approaching, taxpayers still have the chance to pay their tax liability applicable till September 15. Income from business, profession, rent, dividends, freelance work, and capital gains needs to be estimated carefully to assess the total tax liability for a financial year.
Though there is no penalty for late payment, under Sections 234B and 234C of the Income-tax Act, it may attract interest. Those who missed the June 15 deadline for the first instalment still have time to reduce the default arising and avoid any additional interest incurred on late payments.
What is Advance Tax?
Unlike the taxes accumulated over the year to be paid at the time of filing the ITR, Advance Tax is paid as the income is earned. It is paid in instalments by any taxpayer whose net tax liability after accounting for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) is Rs 10,000 or more.
Instalments
First Instalment: June 15 – 15 percent of the Advance Tax
Second Instalment: September 15 – 45 percent of the Advance Tax after deducting the amount already paid
Third instalment: December 15 – 75 percent after deducting taxes already paid
Fourth and final instalment: March 15 – The remaining amount of the total tax liability
The taxpayers first need to assess their total income to correctly calculate the total tax liability. Since the income may change annually, it is not safe to assume that the previous years’ liability would continue in the present year. It may cause a shortfall in the required advance payment. Also, it is important to determine the applicable tax regime, as the deductions and exemptions available under the old tax regime can affect the calculation of taxable income and the resulting tax liability.
The taxpayer had to pay 15 percent of the total tax liability till June 15, while 45 percent of the liability has to be paid till September 15. Those who missed the payment earlier now have to pay the total liability till September 15, including any taxes applicable on the first instalment.
Interest
Failing to comply with the prescribed deadlines may attract an interest of 1% for each month of delay under Section 234C. It means that even without a penalty, the interest accrued per month would keep adding to the outstanding tax due, requiring you to pay more than the actual tax liability.
In case a person pays tax but the amount does not equal the actual tax liability, they are required to pay 1 percent interest on the shortfall amount against the target of the respective instalment.
For example, if a person has a total tax liability of Rs 1 lakh, they are required to pay Rs 15,000 by the June 15 deadline. However, if the actual amount paid was Rs 9,000, the remaining Rs 6,000 would accrue an interest of 1 percent for three months till September 15. The taxpayers must note that a delay of even a few days would be treated as a month’s delay while computing the tax. Paying, however, 12 percent of the tax liability would remove the interest of 1 percent that applies to the shortfall amount otherwise.
Another point to be noted by the taxpayers is that, by the deadline of September 15, if the taxpayer has paid 36 percent of the total liability, no interest would be charged on the remaining amount even if the actual payment had to equal 45 percent.
By the deadline of March, if the person has paid even 90 percent of the total tax liability, no interest would be charged. However, if the total amount paid falls below that limit, an interest of 1 percent on the unpaid amount under Section 234B would come into effect for each month until the outstanding dues are cleared.
