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All you wanted to know about advance tax

PARVATHA VARDHINI C | Updated on January 20, 2018

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In the home stretch to each financial year, advance tax collections become a much-watched metric for a whole bunch of market players. Banks watch the number to predict liquidity requirements, analysts monitor it to forecast quarterly results from companies, and economists scan it to map the economy.

What is it?

Advance tax simply means paying tax as and when the money is earned, rather than wait for the end of the fiscal year. The Income Tax Act requires taxpayers to shell out advance tax, in every case where the tax liability (after TDS cuts) during a fiscal year is ₹10,000 or more. So, based on the estimated income for the full financial year and the calculated tax liability on it at the prevailing rates, assessees are obligated to pay advance rates at quarterly intervals to the taxman.

The deadlines are: at least 15 per cent of the liability on or before June 15, 45 per cent by September 15, not less than 75 per cent by December 15 and the whole amount of the tax calculated, by March 15 of each financial year.

If the estimate of one’s income changes as the instalments progress, the advance tax payable can be increased or reduced accordingly. Any amount paid up to March 31 will also be accepted as advance tax for that financial year.

Why is it important?

The government relies mainly on its tax collections to fund its splurging through the year. So imagine what havoc it can create, if all taxpayers paid their dues only at the year-end? Advance tax receipts solve this problem by ensuring steady revenue flows for the exchequer throughout the year. For the assessees, breaking up the payments into smaller instalments is easier than coughing up the entire tax bill while filing the returns.

For taxpayers, payment of advance tax on time is critical given the stiff penalties prescribed for not toeing the line. If you fail to meet the advance tax by the specified due dates or pay only partially, a 1 per cent interest per month will be charged on the shortfall until the next instalment (that is, for three months).

Again, if the total advance tax paid (including TDS) is less than 90 per cent of the tax liability at the end of the financial year, penal interest is payable.

Why should I care?

Investors in stock markets often use advance tax payments to guess upcoming quarterly results (though this is quite fallible). The advance tax figures of companies are available publicly after each instalment is paid. Using the company’s normal rate of tax (as a percentage of profit) they work back to arrive at the possible profits and compare it with profits of earlier periods.

If you are a tax payer, advance tax provisions are applicable to you. Even after your employer cuts TDS at 10 per cent on your salary, if you have other sources of income or if you fall in the 20/30 per cent tax bracket, you may be liable to pay advance tax if your total tax liability outside of the TDS cuts exceeds ₹10,000. From 2016-17 onwards, the instalment dates as well the percentage of advance tax payments will be the same for corporates, individuals and other assessees.

Earlier, the first instalment for individuals was due only by September 15, at 30 per cent of the tax liability estimated. Similar penalties are applicable for non-compliance too. Senior citizens alone have some relaxations from advance tax payments.

The bottomline

Think of advance tax as your EMI to the taxman.

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Published on April 04, 2016

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