Advance Tax – Know What is Advance Tax & How to Pay it
As the term suggests, advance tax means paying taxes in advance according to a set schedule before the financial year ends. As a taxpayer, you would be familiar with income tax and that it needs to be paid or recovered before the end of a fiscal year.
Understanding advance tax
The advance income tax is currently paid every quarter. This form of tax aids the government to receive tax revenue on an ongoing basis. As a taxpayer, you can make smaller payments every quarter that could be easier on your wallet, rather than making a one-time, lump sum tax payment at the end of the Financial Year - in March.
To understand what is advance tax, it merely means the payment of tax liability by a taxpaying individual before the financial year closes.
As a salaried individual, you may want to know the implications of non-payment of advance tax, how much advance tax needs to be paid, how to pay advance tax online, the income segments on which advance tax is payable and other crucial details, to avoid penalties. Being knowledgeable about taxes can help you to know the difference between the advance tax and self-assessment tax, especially when it comes to filing your taxes or understanding late payment charges.
To understand advance tax for individuals, it is imperative to know how and when you need to pay the tax and other essential factors.
Who must pay advance tax?
All taxpayers who receive taxable income from sources that are not subject to withholding tax, or where taxes are deducted at a lower rate must pay tax in advance. The Income Tax Department has laid provisions for taxpayers to pay advance tax in four easy instalments within specified due dates whose estimated tax liability for the Financial Year surpasses ₹10,000, or more, as per Section 208 of the Income-tax Act, 1961.
Senior citizens, who are 60 years and above, without an income from a business or profession, are exempt from paying advance tax.
Typically, a taxpayer's advance tax payable is decided after making an estimate of the taxpayer's total yearly income, tax payable in that regard, and as reduced by TDS and foreign tax credit. The Income Tax Department also has the authority of estimating a taxpayer's total income and advance tax payable by issuing a notice to make the payment.
The need to pay advance tax
The Income Tax Department has made it a mandatory requirement for qualified taxpayers to make advance tax payment for the benefit of the government. Advance tax facilitates the government in receiving tax income every quarter rather than at the end of the financial year. The option of paying advance tax on a quarterly basis also reduces the taxpayer's burden through the payment of smaller cash discharges.
The advance tax payable in four instalments during a specific financial year is as follows:
Types of income applicable for advance tax
All personal income is liable to tax according to the Income Tax Act. Revenue from monthly rent, interest income, capital gains on the sale of shares or assets, revenue from a profession or business and the like triggers advance tax obligation.
As a taxpayer, one must estimate the total personal income received by the individual during the financial year, ascertain the taxes payable, decrease the quantum of taxes that are reserved while remitting the balance taxes based on specific percentiles, on or before the due date of every specified quarter.
The primary area of concern for every taxpayer is to understand how to estimate one's taxable income since the revenue for the entire financial year must be calculated in advance to pay taxes.
Penalties on delaying or non-payment of Advance Tax
Here’s what you need to know regarding late payment or non-payment of advance tax.
- Failing to pay advance tax or delaying paying advance tax attracts interest under Section 234B and 234C of the Income Tax Act.
- 1% interest is levied every month on the total amount due from April to December, and 1% for the quarter ending March.
- If the advance tax is not paid on time, the simple interest of 1% per month accrues and must be paid on all pending instalments.
- The Income Tax Department also levies interest if the total advance tax paid, in addition to TDS, is less than 90% of the assessed tax.
Implications of avoiding advance tax payment
With regards to salaried individuals, advance tax payable is also levied on any revenue other than the salary, as salary is subject to TDS. Non-payment, deferral of advance tax or partial payment could invite an interest of 1% per month for the first three quarters and 1% for the quarter ending March.
This could cumulate in a total of 10% of the advance tax due. In the event that the taxpayer does not pay 90 % of advance tax by March 31 of a financial year, an interest rate of 1% per month will be levied under Section 234B of the Income Tax Act until all the taxes are paid in full.
This means, if you default in making advance tax payment during the first three instalments, it could result in 3% interest on the tax payable for the quarter. In contrast, a default in paying the last instalment could result in 1% interest on the advance tax payable.
Conclusion
You can make advance tax payment off-line by filling in Challan 280 at authorised bank branches. Similarly, you can also make the payment online via the Income Tax Department's website that offers detailed instructions. Calculate your taxable income and adjust your tax payment accordingly to know your advance tax payable.
As a taxpayer, it can help to estimate your total taxable income for the entire financial year in advance. Paying taxes as per the advance tax due dates can save you from the interest levied on a non-payment or short payment of the advance tax. In addition to avoiding paying high-interest amounts, it could also help in reducing the stress of paying significant tax amounts at the time of filing your income tax returns.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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ITR Filing - Penalty for Late Filing of Income Tax Return
Introduction Most taxpaying individuals seem to view filing income tax returns as burdensome and a hassle. However, filing income tax returns is no longer cumbersome like it used to be. With the advent of the online filing, also known as e-filing, the days of standing in long queues and the endless anxiety of meeting the tax filing deadlines are far behind. Today, you can conveniently file your returns from your home or workplace in a matter of minutes. But delaying or missing out on registering your ITR in time could incur substantial penalties. Importance of filing on time Taxpayers typically receive notifications from the Income Tax Department regarding necessary income tax-related days in advance. In order to avoid paying the income tax penalty for late filing of your income tax returns, it can help to create an alert for such dates or mark them on your calendar. Filing your income tax returns comes with specific advantages such as carrying forward of losses, claiming an income tax refund, reporting one's revenue or income for the financial year and avoiding paying penalties. Any returns filed after the deadline usually calls for late payment fees of up to ₹10,000. The need to file Income Tax Returns As a taxpayer, you are called to declare your revenue, tax deductions, investments, expenses and taxes through a form to submit to the Income Tax Department. Under the Income Tax Act, 1961, it is mandatory for every taxpayer to file income tax returns. The facility of filing taxes can now be done online, and hence it is crucial to have necessary documents at the time of filing returns. Understanding penalties As a taxpayer, the penalty for late filing of income tax return could be: ₹5000 if income tax returns are filed after the deadline of the relevant Assessment Year. In this case, on or before December 31 of the relevant Assessment Year. ₹10,000 if income tax returns are filed after the deadline but before the end of the relevant Assessment Year. In this case, after December 31, 2019, but before March 31, 2020. If your cumulative income does not exceed ₹5 lakhs, you could be liable to pay ₹1000. The law of placing penalties for late filing of income tax returns was introduced in the Budget 2017, under Section 234F. It subsequently became valid for the Financial Year of 2017-18 or the Assessment Year 2018-19 and forward. The year that directly follows the Financial Year for which the ITR has to be filed is regarded as the Assessment Year. Hence, the Assessment Year for Financial Year 2018-19 is 2019-2020. Simplifying the Section 234f penalty through examples To understand how penalties can affect taxpayers, let's look at them through instances. Example 1: Say, Mr X earns a yearly income of ₹6 lakhs. If he files his income tax return for Assessment Year 2019-2020 on August 25, 2019, he will not be required to pay the penalty under Section 234F. This is because, since Mr X filed his income tax returns within the due date, he was saved from paying a late fee. Example 2: Mr A earning a yearly income of ₹7 lakhs filed his income tax return for Assessment Year 2019-2020 on November 10, 2019, would have to pay ₹5000 as penalty fee. This is because Mr A filed his income tax return after the due date, but before December 31, 2019. Example 3: Mr D earning an annual income of ₹5.5 lakhs filed his income tax return for Assessment Year 2019-2020 on February 2, 2020, he would have to pay a late penalty fee of ₹10,000. This is because, Mr D filed his income tax return after the due date and after December 31, 2019. Importance of filing taxes While paying taxes is essential, filing your tax return holds even greater importance. While there are numerous advantages of filing your returns within the permissible timeframe, the consequences of delaying them can prove to be expensive such as paying the penalties under Section 234f income tax. Hence, as a salaried individual, it is crucial to complete your tax return filing when you receive Form 16. By adhering to deadlines, there is no need to worry about late payment fees. Repercussions of delayed ITR returns If you delay filing your income tax returns, you may not be able to carry forward your losses from capital gains, except for losses from house properties. Besides, being late in filing your taxes could also incur interest on unpaid tax. In addition, not filing your tax returns on time could cause you to lose the interest on any refundable amount if you are eligible for refund and interest on that refund. Besides, if you fail to file your returns on or before the deadline, it could invite an additional interest of 1% per month or until the time you clear the amount on the unpaid taxes. The interest is applicable under section 234A of the Income Tax Act. For instance, the due date to file your income tax returns in a particular Financial Year is August 31, but you file your taxes on December 30. In this case, if your total outstanding is ₹1 lakh, having taken into account advance taxes and TDS, the total interest payable would be ₹4000, with interest charged at 1% for four months. However, in the event that you have to pay the fee under Section 234F, you need to apply Challan Code ITNS 280. To pay the penalty, the taxpayer must visit the NSDL website and select Challan ITNS 280. There are two ways to make late payment fees. It can be included as the total income tax due The amount can be mentioned under 'Other' head. Conclusion Ensure that you file your income tax returns by the due date if your revenue surpasses the exemption limit. It is crucial to file your income tax returns on time if you have to deposit balance tax, expect a significant refund amount or have to carry forward your losses. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
NEXT STORY
Know What is Infrastructure Investment Trusts & its Importance
Critical to any emerging economy are two significant sectors – the country's infrastructure and real estate. And keeping these two sectors in mind, it must be noted that a well-build infrastructural arrangement thrusts a country's overall development. Having robust infrastructure is also crucial in facilitating a steady inflow of foreign investments and private equity. A fresh inflow of funds is vital in expanding the capital base necessary for the growth of these crucial sectors in a country's economy. Besides, such investments are also essential in boosting the growth of the segments in a sustained manner. Understanding Infrastructure Investment Trust (InvITs) To know what is invit, it can help to understand and know the invit full form. Regarded as a collective investment scheme similar to a mutual fund, an Infrastructure Investment Trust (InvIT) is crucial in enabling the direct investment of money from individuals and institutional investors towards infrastructure projects. Keeping in mind the vast infrastructure needs of the country, InvITs can allow developers of infrastructure projects to monetize their assets by drawing numerous projects under a single trust structure or infrastructure investment fund. Falling under the ambit of the SEBI, InvITs are regulated the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Detailed guidelines on the public issue of units of InvITs are declared in SEBI's latest circular. What is an infrastructure investment trust? As a first of its kind long-term instrument, InvITs can be structured as funds with an extended tenure or as an open-end structure. Currently, government securities (G-Secs) are the only other instruments with a very long tenure like InvITs. As a structure built in a tiered format, InVITs have a sponsor at the helm. This sponsor sets up the InvIT that further invests into suitable infrastructure schemes directly or through special-purpose vehicles (SPVs). With regards to public-private partnership projects, InvIT investments can only be made through SPVs. Latest developments in InvITs In 2016, India Grid Trust filed its the first draft offer document for India's first-ever power sector InvIT with SEBI. Following this, the first public offerings of InvITs came to the stock market in 2017 from IRB Infrastructure Developers Ltd, and Sterlite Power Grid. Interestingly, in 2019, several, large, private InvITs such as Reliance Industries Limited setup investment trusts for its gas pipelines and telecom towers worth Rs. 38,000 crores. Early this year, the Infrastructure Leasing and Financial Services (IL&FS) group proposed creating an InvIT to house the group's road assets and compensate lenders by offering units at zero cost. Currently, five public infrastructure trusts have raised approximately Rs 40,000 crores. A recent report by CRISIL revealed that InvIT issuance could further grow fivefold to Rs 2 lakh crore within the next two years. Characteristics Under SEBI regulations, InvITs must ensure they distribute 90% of their net cash flows to investors. A leverage of 49% is placed on the InvITs net asset value. For publicly placed InvITs, or under construction assets, a cap is placed on its exposure. Sponsors responsible for setting up the InvITs are also accountable for appointing the trustees. The sponsor holds a minimum of 15% of the units issued by the InvITs, with a lock-in period of three years from the date of its issuance. Under the InvITs regulations, companies are also required to maintain specific investment ratios, such as 80% of investments in completed and revenue-generating assets. The specified minimum investment limits are pegged at Rs. 10 lakh per investor, as can be seen in all the InvITs filed so far. The investment in such projects helps investors in reaping a decent portion of the income as yields. However, given that regulations in this avenue are new, most InvITs that are likely to raise money will have a negligible or a very short track record. Distribution of dividends InvITs are required to distribute dividends regularly. These dividends must be distributed once in every six months. The amount available for distribution depends on the interest income or the InvITs own dividend, as well as principal payments from its portfolio. If you are an eligible non-resident investor, it can help to note that distributions, dividends and refunds if any will be payable in Indian rupees only. The Union Budget 2020 and InvITs To ensure that tax treatment is uniform across InvITs, the Union Budget 2020 extended the definition of business trusts to include unlisted InvITs as well. This move could help in further boosting investments in the infrastructure space. Also, the recently announced Union Budget 2020 accorded tax passes through status to private unlisted InvITs. Until recently, only publicly listed InvITs were granted tax exemptions. Given the tax exemption for the private InvIT structure, sponsors and investors can now look to divest their infrastructure assets through this route. Until recently, InvITs could be placed privately but had to be listed on exchanges. This meant that several regulations had to be dealt with regarding insider-trading and price-sensitive information. Now, with privately placed InVITs, these are done away with as they are privately negotiated structures. Tax exemptions for InvITs As an investor in InvITs, you can benefit from favourable tax exemptions, such as dividend distribution tax. As a unitholder of InvITs, you will be required to pay tax on the dividend income at the appropriate income tax rate. But, if you hold InvITs units for over three years, you can enjoy tax exemption on capital gains and dividend income if sold through the stock exchange. However, NRI unitholders have to pay a tiny withholding tax for interest income. Besides, you can also benefit from the pass-through structure of InvITs authorising the allocation of a minimum 90% of net-distributable cash and zero dividend distribution tax. Importance of InvITs Since infrastructure is an integral component of a country, it requires requisite public funds to stimulate their growth. This is why additional channels of financing, such as InvITs are established. As an innovative vehicle, InvITs are crucial in monetizing revenue-generating infrastructure assets and helping investors or unitholders to invest in such projects without possessing them. As a monetisation medium, developers can profit from InvITs by using investor capital to fund new infrastructure projects. In turn, investors or unitholders receive liquidity to investors when the units of the project are listed on stock exchanges. Conclusion With the new tax pass-through benefit, large investors such as pensions and sovereigns can now consider private InVITs to become attractive investment structures. Given its yield generating potential, regulated by SEBI, easy liquidity and a compulsory requirement to distribute cash regularly as and when produced, InVITs hold the possibility of becoming a lucrative and promising investment avenue. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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