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Failure to pay advance tax attracts penalty
January, 25th 2011

Advance tax, as the name suggests, is nothing but taxes paid in advance on the estimated annual income. Advance tax, along with tax deducted at source (TDS) and self-assessment tax, constitute the three means by which income taxes are collected by the government. Since the government machinery needs constant flow of funds, it cannot wait till the year end for tax payers to compute their income and then pay taxes, hence the provisions for advance tax forms part of the Income Tax Act.

Advance tax needs to be paid by all individuals, irrespective of whether they are consultants, businessmen or salaried. However, the liability to pay advance tax arises only if the tax payable (after taking the benefit of TDS and other prescribed credits) is Rs 10,000 or more.

Individuals need to pay advance tax in three installments. To illustrate, if the tax on total estimated income for the year is Rs 1,00,000 and taxes estimated to be deducted at source from this income is Rs 60,000, the amount payable as advance tax would be Rs 40,000.

Failure to pay or any delay in payment of advance tax as above attracts mandatory interest of 1% per month.

In case of a salaried individual having no other sources of income, there is normally no need to worry on advance tax because his employer is obliged to deduct tax (payable on salary income after considering the deductions on account of investments) at source on his full salary.

The individual also has the option to declare any other income, for example rental income or capital gains, to his employer if he wants that income to be considered for deducting tax from his salary.

This saves the individual from the hassle of keeping track of the advance tax deadlines.

However, in case of an individual, having worked with two or more employers during the year, either parallel or sequentially, there may arise a situation that even in absence of any other income, the individual may be required to pay advance tax on his salary income.

This happens when, in absence of the details of salary earned from the other employer, the benefit of slab (Rs 160,000 for male, Rs 190,000 for resident female and Rs 225,000 for senior citizen) is allowed by each employer separately.

At the time of final income and tax computation, where the benefit of slab is taken only once, some tax may become payable which will need to be paid as self-assessment tax before filing the return.

To conclude, salaried people who have switched jobs during the year should furnish the required income details to their subsequent employers so that correct taxes are deducted and there are no shortfalls at the year end.

* The author is manager, Ernst & Young


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