Understanding Advance Tax and Penalty Under Advance Tax

Savvy Midha

22 Jun, 2023

Advance Tax is applicable on every self-employed businessperson, professionals, freelancers, whose income falls within the jurisdiction of Income Tax Act, 1961. Any taxpayer, including Non-Resident Indians, who have their income from India and their tax liability exceeds INR 10,000 has to pay the advance tax compulsorily. Therefore, it is necessary to know about the provisions and various penalty under the advance tax.

Senior citizens who don’t have any income from business or profession are exempted from the purview of this section. Any assessee who receives Income whose payer at the time of making such payment deducts the tax on source needs not to make any advance payment of tax, for example, salaried employees.

Taxpayers who opt for the Presumptive Taxation Scheme under the Income Tax Act have to pay the entire amount of advance tax on or before the 15^th day of March.  Presumptive Taxation Scheme was introduced to reduce the tax burden of small businessmen and professionals. As per this scheme, the business income is assumed to be 8% of the gross or total turnover (6% in case the gross receipt is received through any electronic modes, account payee bank draft or cheque).

Scope of Advance Tax

Following taxpayers are covered within the scope of Advance Payment of Tax:

• Salaried employees, freelancers, and businessmen: Payment of advance tax applies on every taxpayer including salaried employees, freelancers or businessmen provided income tax liability exceeds INR 10,000. However, the advance tax does not apply to a senior citizen who is above the age of 60 years and does not have any income from the business.
• Businessmen who opt for Presumptive Scheme:  The taxpayers who are businessmen and opt for presumptive taxation scheme under section 44AD are required to pay the entire advance tax in only one installment on or before 15^th March.
• Professional who opts for Presumptive Taxation Scheme: The taxpayers who are independent professionals such as lawyers, practicing CA, practicing CS, architect, etc. come under the purview of section 44ADA. They have to pay their entire advance tax liability in one installment on or before 15^th March.

Due Dates for Advance Tax

• Due dates for the payment of Advance Tax for taxpayers other than those who opt for Presumptive Scheme:

• Due dates for the payment of Advance Tax for the taxpayers who opt for Presumptive Scheme under section 44AD and 44ADA:

The Penalty in Default of Advance Tax Payment

As per section 234B, interest is levied as a penalty on the following taxpayers:

1. Fails to pay the advance tax up to the due date; or
2. Have paid less than 90% of the advance tax assessed during the year.

Rate of Interest: The taxpayer for default payment in advance tax is penalized for paying interest at the rate of 1% simple interest per month. The interest is calculated on the unpaid amount of advance tax.

The penalty is levied with effect from 1^st April of the relevant financial year till the date of self-assessment of tax or till the date of total income determined under section 143(1) (earlier of the two). As per section 143(1)^[1], Income Tax Department issues the notice to the taxpayer determining the tax liability. In layman terms, interest is calculated from the due date till the date of actual payment.

Penalty for Default in An Installment of Advance Tax Payment

The penalty in the form of interest is levied under section 243C if the installment paid is less than the advance tax required:

• If the advance tax paid on or before 15^th June: less than 12% of the advance tax payable
• If the advance tax paid on or before 15^th September: less than 36% of the advance tax payable
• If the advance tax paid on or before 15^th December: less than 75% of the advance tax payable
• If the advance tax paid on or before 15^th March: less than 100% of the advance tax payable

Exception: There will be no levy of interest under section 234C in case the taxpayer fails to assess the following income under

• Capital Gain; or
• Income for winning of lotteries, crossword puzzle, etc. as referred to in section 2(24)(ix); or
• Income from a new business. 

Period of Interest: Interest under section 234C is levied for three months for the default or shortfall in payment 1^st, 2^nd and 3^rd installment of advance tax. Interest is levied for one month in case of default in the last installment. 

Illustration for Better Understanding of Section 234C

Mr. X is a businessman. His taxable liability is INR 45500. He has paid advance in following slabs:

INR 8000- 15^th June

INR 11000- 15^th September

INR 12000- 15^th December

INR 14500- 15^th March

1. For the first installment: 15% of 45500 = 6825 shall be paid within 15^th June. However, Mr. X has paid 8000. Thus no interest is levied.
2. For the second installment: 45% of 45500 = 20475 shall be paid within 15^th September. He has paid 8000+11000= 19000. There is a shortfall of 1475, but there will be no interest levied because he has paid a minimum 36% of advance tax: 36% of 45500 = 16380.  
3. For the third installment: 75% of 45500 = 34125 shall be paid within 15^th December. Advance Tax paid 8000+11000+12000 = 31000.  The shortfall of the payment is INR 3125. Thus he will be liable to the payment of interest at the rate of 1% for 3 months under section 234C. Interest levied = 3125*1/100*3 = 93.75 (rounded off to INR 93).
4. For the last installment: 100% of 45500 shall be paid by 15^th March.  Total Advance Tax paid by the taxpayer is 8000+11000+12000+14500 = 45500 is paid within the due date. And thus no interest is levied for the last installment.