If you have paid attention to newspapers in last few days, there are lots of advertisements from Income Tax Department about paying your advance taxes before March 31, 2013.
Most Salaried individuals are not aware about advance tax and there is a misconception that Advance taxes needs to be paid by businessmen or self employed professionals. But salaried employees too need to pay advance tax under following conditions:
- If they have any income in addition to salaried income (including interest income from Fixed Deposits/ Saving Accounts, Capital Gains, etc) and
- The difference in actual tax liability on such income and TDS (Tax Deduction at Source) is more than Rs 10,000
Lets explain the concept of advance tax by an example.
Mr. Ram has annual salary of Rs 15 lakhs and he falls in highest tax bracket of 30%. He also has Rs 10 Lakhs in fixed deposit with a bank which pays him interest of 9% every year.
Salary Income = Rs 15 lakhs
For salary income, the employer deducts TDS and submits the same to the income tax department and hence Ram need not be worried about advance taxes on his salary income.
Interest income = Rs 10,00,000 x 9% = Rs 90,000
- As per rule the banks deducts TDS at 10.3%. So the bank would deduct Rs. 9,270 (Rs 90,000 x 10.3%) as TDS and deposit the same on behalf of Ram to income tax department.
- Since Ram’s income falls in highest tax bracket, his actual tax liability on interest received on Fixed Deposit comes out to be Rs. 27,810. So Ram is liable to pay Rs 18,540 (27,810 – 9,270) more as income tax.
- Since this income tax liability difference is more than Rs 10,000 Ram would need to deposit advance taxes.
Also Read: How you loose money in Fixed Deposits?
When is Advance Tax Payable?
For individuals, advance tax is payable in three installments in a financial year.
So for FY 2012-13 (AY 2013-14) the advance taxes needs to paid as follows:
- At least 30% of estimated tax difference by September 15, 2012
- At least 60% of estimated tax difference by December 15, 2012
- 100% of estimated tax difference by March 15, 2013
Here the Tax difference means the difference between the actual tax liability and the TDS.
So if we take above example, Mr. Ram had to pay
- At least Rs. 5,562 (30% of 18,540) as advance taxes by September 15, 2012
- At least Rs. 11,124 (60% of 18,540) as advance taxes by December 15, 2012 [This included previous installment of Rs 5,562]
- And Rs. 18,540 before March 15, 2013
The advance tax dates have been extended till March 31, 2013 so the last installment can be paid on or before this date.
How to pay Advance Tax?
Paying advance tax is simple. You need to go to income tax website and fill the relevant form and pay online through your bank account.
You can also do it offline by visiting the nearest bank branch which deals with income tax.
What if you don’t pay Advance Taxes?
As I mentioned earlier, the awareness about advance taxes in not high among salaried class and hence they might have skipped paying advance taxes. In case you have not paid advance taxes, a penal interest of 1% simple interest per month on outstanding tax is charged u/s 234C and 234B.
We take the above example and there are two situations:
Situation 1: Mr. Ram skipped the advance tax payment in September and December and paid on March 31, 2013.
The interest he needs to pay is:
- 1st installment penal interest: Rs 5,562 x 3 months x 1% = Rs 167
- 2nd installment penal interest: Rs 11,124 x 3 months x 1% = Rs 334
- Total penal interest = Rs 501
So on March 31, 2013 has to pay Rs 18,540 along with additional Rs 501 as penal interest u/s 234C
Situation 2: Mr. Ram did not pay in FY 2012-13 and pay the tax during filing of Tax Return on July 31, 2013
- In this case there would be additional penal interest from April to July 2013 u/s 234B. This interest comes to be Rs 18,540 x 4 months x 1% = Rs 742
He has to pay this Rs 742 (u/s 234B) along with the Rs 501 (u/s 234C) calculated above as the penal interest.
The easier way out?
In case you do not want to go with all the hassel of calculating taxes and paying advance taxes, the easiest way out is to declare income from other sources to your employer. They would accordingly calculate your tax liability, deduct TDS from your salary and deposit it with income tax department.
Exemption from paying Advance Taxes
- As stated above, if the difference between your actual tax liability and TDS is less than Rs 10,000 then you are not required to pay advance taxes.
- Since FY 2012-13 Senior citizens who have no income from business or profession are exempted from paying advance taxes. Accordingly, now the senior citizen could pay tax after the FY ends on March 31 as “self assessment tax” on taxable income before filing returns.
Situations salaried employees need to pay Advance Tax
Here are some situations where I think salaried employees need to take care about payment of advance taxes:
- If you have large amount of interest income from Fixed Deposits or saving bank Account or Bonds etc
- In case you have changed jobs in a financial year but have not declared the income from previous employer to your present employer. This would lead to lesser tax deduction and you will need to look into advance tax payment.
- In case you have made capital gains by selling property, gold, mutual funds, stocks, etc and liable to pay taxes on them.
I am sure you can come out many more such situations but remember to pay advance taxes if you have any other income.
Today is the last day of FY 2012-13. You must calculate your tax liability for this financial year and pay advance taxes if applicable. You can do it online or go to your bank branches today. The banks and income tax office both are open for business today.
Also its good time to start planning for next year which starts tomorrow. You can download the Income Tax calculator for FY 2013-14 and start planning your taxes accordingly.
You can download the following files for calculating your Income Tax liability and also to know How to save Tax!