Advance tax is payment of part of your taxes before the end of the financial year. All taxpayers in India are required to pay advance tax despite their income being subject to tax deducted at source (TDS).

If tax payable for the year is Rs 10,000 or more, advance tax can be paid without submitting any estimate or statement of income in four instalments on or before the specified date. Tax should be paid as per the specified percentage of the estimated income for the whole year as given below:

TDS is treated as advance tax paid. Senior citizens are exempt from paying advance tax if they do not have any business or professional income. FA16 has clarified that a return, which is otherwise valid, would not be treated defective merely because self-assessment tax and interest payable in accordance with the provisions of Sec. 140A have not been paid on or before the date of furnishing of the return.

Interest payable

Simple interest at the rate of 1 per cent per month or part thereof as reduced by the interest paid, if any, is chargeable on the shortfall on advance tax paid in following cases:

Sec. 144: Best Judgment

ITO shall make the assessment to the best of his judgment in the following 3 cases:

1. The assessee has failed to make the voluntary return.
2. There has been a failure to comply with all the terms of a notice to produce accounts or other documents.
3. The AO considers the return to be incorrect or incomplete and serves a notice, but the assessee does not respond.

In such cases, interest is chargeable from the due date to the date of best judgment assessment.

Sec. 234A: Not filing or late filing of the returns

Interest is payable from the due date to the date of i) filing the return or ii) completion of assessment where no return is furnished. There is no provision for reduction or waiver of interest and the question of granting opportunity of being heard does not arise. Interest is leviable on tax on the total income declared in the return and not on the income as assessed and determined by the assessing authority.

Sec. 234B: Advance tax paid is less than 90 per cent

Interest is payable on the shortfall from April 1 next to the date of assessment. In this case, the interest will be charged on the income as assessed by the ITO. The assessee was entitled to interest u/s 214 for excess advance tax paid during the financial year, even if the tax was paid beyond the dates specified u/s 211 of the Act.

Sec. 234C: Shortfalls of first 3 installments

Interest is payable @1 per cent per month for 3 months each (when the next installment falls due) on the amounts of shortfall of 15 per cent or 45 per cent, or 75 per cent respectively, even if the delay is just by one single day. If the advance tax paid on or before March 15 is less than the tax due on the returned income, then the assessee shall be liable to pay simple interest @1 per cent on the amount of the shortfall.

Sec. 234D: Excess refund paid to assessee

If any refund has been granted to the assessee u/s 143(1) and subsequently on regular assessment, no refund or lesser amount of refund is found due, then the assessee shall be liable to pay simple interest u/s 234D @ ½ per cent on the excess amount refunded for every month or part of the month, starting from the date of refund to the date of such regular assessment.

Sec. 244A: Refund due

Where refund is due on account of excess payment of tax, either through advance tax paid by the assessee or through application of TDS, simple interest will be paid to the assessee @0.5 per cent for every month or part of a month from the date of payment of the tax to the date on which the refund is granted. No interest will be paid if the refund is less than 10 per cent of the tax. FA16 raised this interest rate at 0.75 per cent if there is delay beyond 90 days.

FA17 has inserted a new sub-section (1B) to provide that where refund of any amount becomes due to the deductor, such person shall be entitled to receive, simple interest @0.5 per cent for every month or part of a month, from the date on which claim for refund is made. No interest is payable if the delay is attributable to the deductor.

Unanticipated income and capital gains

No interest is charged with respect to income, which was neither anticipated nor contemplated, received after the due dates for advance tax. However, it is necessary to pay advance tax on such income at the very next due date. For instance, if the assessee earns capital gains on October 25, he should pay 75 per cent tax on or before December 15 and 25 per cent additional tax on or before March 15.

Many assessees are used to make payments on the last day of the year. FA94 had taken corrective action by treating such payments as received late.

The authors, A.N. and Sandeep Shanbhag, are leading financial advisors. Write to them at wonderlandconsultants@yahoo.com