TAXOLOGY 101-Advance Tax
Who should pay advance tax?
If you are salaried, you need not pay advance tax as your employer deducts tax at source (TDS). However, you still need to file it if you have other sources of income, increasing your liability to more than Rs 10,000. Professionals (self-employed) and businessmen will have to pay taxes in advance as, given their business income, the liability can be huge. The same goes for companiesand corporates.
What is the taxology behind this?
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 assesses, 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, at 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.
Can you use this to your advantage?
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.
Why should you care?
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 are be the same for corporates, individuals and other assesses.
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 advancetax payments.
The Bottom Line- Advance tax is another master stroke by the taxman, but there a few ways it is not so beneficial for the tax payers such as in the home stretch of the financial year if a person accrues a huge amount of income via different sources and it was not foreseen beforehand he will be liable to pay interest because of insufficient payment of advance tax and there is no way around this, even if payments till 31st March form a part of your advance tax. But the end result is that advance tax is one of the most important parts of taxation and can be used for various purposes, so the tax payer should just think of advance tax as an EMI to the taxman.