Salaried individuals, who are subject to withholding tax on their salary, have always had questions with regard to advance tax, such as, why is advance tax payable, what are the implications of non-payment, how much of advance tax has to be paid, which are the income segments on which advance tax is payable, etc. And, many times unknowingly when it comes to filing one's taxes people end up paying penalty while filing their tax returns.

“In order to meet the objective of collecting revenues throughout the year, the norm of paying taxes in advance has been mandated. As the name itself suggests, taxes have to be paid in advance and not at the end of the financial year,” said Saraswathi Kasturirangan, Partner, Deloitte India.

Thus, to know how and when one should pay advance taxes, there are things that one should be aware of.

Who should pay advance tax?

Taxpayers with taxable income from any source which are not subject to withholding tax or where the taxes are deducted at a lower rate are mandated to pay taxes in advance. Taxpayers are required to pay advance tax in 4 instalments within the specified due dates if such tax payable is Rs 10000 or more. Senior citizens (60 years or more) who do not have income from business/profession are exempt.

Aditya Modani, Director, Tax & Regulatory Services, EY India said the advance tax payable is determined by making an estimate of the total income, tax payable thereon and as reduced by TDS and foreign tax credit. “Also, the Revenue Authorities have powers to estimate the total income and advance tax payable by a taxpayer and issue a notice for payment of the same,” he added.

Why pay advance tax?

Advance tax payment is a mandatory requirement that facilitates the government to receive the tax revenue on a quarterly basis rather than waiting until the end of the financial year. This also reduces the burden of the taxpayers as the tax liability can be discharged through quarterly payments resulting in smaller cash outflows.

When is advance tax payable?

The advance tax is payable in four instalments during the financial year over which the income is earned:

Which are the incomes on which advance tax is payable?

Kasturirangan said all personal income which is liable to tax as per the Income Tax Act, triggers advance tax obligation. These include rental income, interest income, capital gains on the sale of assets/shares, income from business or profession etc. “Taxpayers are required to estimate the total personal income which is receivable during the entire financial year, determine the taxes payable, reduce the quantum of taxes which are withheld and remit the balance taxes, based on specified percentages, on or before the due date every quarter,” she said.

The major area of concern in this mechanism is estimating the taxable income since the income for the entire financial year has to be estimated in advance for the payment of taxes.

What are the implications for non-payment of advance tax?

In case of a salaried employee, advance tax payable is on income other than salary, as the same is subject to TDS. “Failure to pay or deferral or short payment of advance tax invites interest at a rate of 1% per month for first three quarters and 1% for the quarter ending March (totalling to 10% of the advance tax due). In case 90% of advance tax is not paid by 31 March of the financial year, interest at a rate of 1% per month is levied under section 234B of the Act until taxes are paid,” said Modani.

In other words, default in advance tax payment during the first three instalments would result in 3 per cent interest on the tax payable for such quarter and default in the payment of the last instalment would result in 1 per cent interest on the tax payable.

Kasturirangan said the Act provides respite to taxpayers for capital gains since the gain arises only when there is an actual sale and hence the interest is applicable only from the relevant quarter in which the transaction takes place.

"However, there could be situations where estimating income in advance is not possible, but there is no respite provided. As an example, a resident and ordinary resident individual departs from India in December 2018 and is taxable in India on salary relating to the period December 2018 to March 2019. The advance tax obligation for this income is triggered from June 2018 and interest is computed from the first instalment of advance tax. While this seems totally unfair, this is the reality," she said.

In a nutshell, taxpayers have to estimate the taxable income for the entire financial year well in advance and pay taxes as per the advance tax due dates. This would help taxpayers avoid paying high-interest amounts and also aid in the reduction of the stress of shelling out substantial amounts as tax at the time of filing the tax returns.