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• Posted 01 Jun, 2024
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Avoiding Penal Interest: A Guide to Advance Tax Payments

The Indian Income-tax Act, 1961 mandates the payment of advance tax, which ensures taxpayers pay their taxes in installments rather than a lump sum at the end of the financial year. This article provides an overview of the advance tax system, its due dates, and the consequences of not paying it on time, with an emphasis on how taxpayers can avoid interest penalties by adhering to the advance tax schedule.

What is Advance Tax?

Advance tax, also known as "pay-as-you-earn" tax, requires taxpayers to pay taxes in advance on their estimated income. It applies to individuals, corporates, and other entities whose tax liability exceeds ₹10,000 in a financial year.

Due Dates for Advance Tax Payments

The due dates for advance tax payments are as follows:

 For Corporates & Individuals:

-15th June: 15% of the total tax liability
-15th September: 45% of the total tax liability
-15th December: 75% of the total tax liability
-15th March: 100% of the total tax liability

Consequences of Not Paying Advance Tax on Time

If advance tax is not paid on time, the taxpayer is liable to pay interest under Sections 234B and 234C of the Income-tax Act, 1961.

Section 234B: Interest for Default in Payment of Advance Tax

Interest under Section 234B is applicable if:

1. The taxpayer has failed to pay advance tax.
2. The advance tax paid is less than 90% of the assessed tax.

The interest is calculated at 1% per month or part of a month on the amount of the shortfall from the end of the financial year until the actual date of payment.

Section 234C: Interest for Deferment of Advance Tax

Interest under Section 234C is applicable if the taxpayer defaults in paying the advance tax installments as per the prescribed due dates. The interest is calculated at 1% per month for a period of three months on the amount of shortfall for each due date.

How to Save Interest by Paying Advance Tax on Time

To avoid interest under Sections 234B and 234C, taxpayers should ensure that they estimate their income accurately and pay advance tax as per the due dates.

 Illustration for Individuals

Let's consider an example to understand the impact of paying advance tax on time versus paying it all on the due date of filing the return.

Scenario 1: Individual Paying Advance Tax on Time

Mr. X, an individual, estimates his tax liability for the financial year 2024-25 to be ₹1,00,000. He pays advance tax as per the schedule:

- 15th June 2024: ₹15,000 (15% of ₹1,00,000)
- 15th September 2024: ₹30,000 (45% of ₹1,00,000 minus ₹15,000 already paid)
- 15th December 2024: ₹30,000 (75% of ₹1,00,000 minus ₹45,000 already paid)
- 15th March 2025: ₹25,000 (100% of ₹1,00,000 minus ₹75,000 already paid)

Since Mr. X has paid the advance tax as per the schedule, he avoids any interest under Sections 234B and 234C.

Scenario 2: Individual Paying Entire Tax on 31st July 2025

Mr. Y, another individual, also has a tax liability of ₹1,00,000 for the financial year 2024-25. However, he pays the entire tax amount on 31st July 2025, the due date for filing the return.

In this case, Mr. Y would be liable to pay interest as follows:

  - Interest under Section 234B:
  - Tax paid less than 90% of the assessed tax.
  - Interest = 1% per month from 1st April 2025 to 31st July 2025 (4 months) on ₹1,00,000.
  - Interest = ₹1,00,000 * 1% * 4 = ₹4,000.

- Interest under Section 234C:
  - For shortfall in June installment: ₹10,000 * 1% * 3 months = ₹300.
  - For shortfall in September installment: ₹15,000 * 1% * 3 months = ₹450.
  - For shortfall in December installment: ₹15,000 * 1% * 3 months = ₹450.
  - For shortfall in March installment: ₹25,000 * 1% * 1 month = ₹250.
  - Total Interest = ₹300 + ₹450 + ₹450 + ₹250 = ₹1,450.

Total interest payable by Mr. Y = ₹4,000 (under Section 234B) + ₹1,450 (under Section 234C) = ₹5,450.

Effective Percentage of Interest:
- Additional outflow: ₹5,450.
- Effective percentage of interest = (₹5,450 / ₹1,00,000) * 100 = 5.45%.

Illustration for Corporates

Now let's consider an example for a corporate entity.

Scenario 1: Corporate Paying Advance Tax on Time

ABC Ltd. estimates its tax liability for the financial year 2024-25 to be ₹10,00,000. The company pays advance tax as per the schedule:

- 15th June 2024: ₹1,50,000 (15% of ₹10,00,000)
- 15th September 2024: ₹3,00,000 (45% of ₹10,00,000 minus ₹1,50,000 already paid)
- 15th December 2024: ₹3,00,000 (75% of ₹10,00,000 minus ₹4,50,000 already paid)
- 15th March 2025: ₹2,50,000 (100% of ₹10,00,000 minus ₹7,50,000 already paid)

Since ABC Ltd. has paid the advance tax as per the schedule, it avoids any interest under Sections 234B and 234C.

Scenario 2: Corporate Paying Entire Tax on 31st October 2025

XYZ Ltd. also has a tax liability of ₹10,00,000 for the financial year 2024-25. However, it pays the entire tax amount on 31st October 2025, the due date for filing the return for corporates.

In this case, XYZ Ltd. would be liable to pay interest as follows:

- Interest under Section 234B:
  - Tax paid less than 90% of the assessed tax.
  - Interest = 1% per month from 1st April 2025 to 31st October 2025 (7 months) on ₹10,00,000.
  - Interest = ₹10,00,000 * 1% * 7 = ₹70,000.

- Interest under Section 234C:
  - For shortfall in June installment: ₹1,00,000 * 1% * 3 months = ₹3,000.
  - For shortfall in September installment: ₹3,00,000 * 1% * 3 months = ₹9,000.
  - For shortfall in December installment: ₹3,00,000 * 1% * 3 months = ₹9,000.
  - For shortfall in March installment: ₹2,50,000 * 1% * 1 month = ₹2,500.
  - Total Interest = ₹3,000 + ₹9,000 + ₹9,000 + ₹2,500 = ₹23,500.

Total interest payable by XYZ Ltd. = ₹70,000 (under Section 234B) + ₹23,500 (under Section 234C) = ₹93,500.

Effective Percentage of Interest:
- Additional outflow: ₹93,500.
- Effective percentage of interest = (₹93,500 / ₹10,00,000) * 100 = 9.35%.

Conclusion

Paying advance tax on time not only ensures compliance with the Income-tax Act but also helps taxpayers avoid hefty interest liabilities. It is crucial for both individuals and corporate entities to estimate their income accurately and adhere to the advance tax payment schedule to save on interest costs and avoid penalties. Proper planning and timely payments can lead to significant savings and smoother financial management.