Every individual investor who has a tax liability of Rs5000 and above is liable to pay installment of advance tax. Here is a check list of the points one should consider while paying the amount, inorder to avoid interest penalty.
1. Estimate the total income for each year and calculate the tax liability on such income.
2. Reduce such amount by the total TDS during the year.
3. Out of the arrived sum, reduce the amount of capital gain tax during the year and take 30% of the resulting amount, which should be the first installment to be paid on or before September 15.
4. For the second installment to be paid before December 15, calculate 60% of the amount in Step 2 after deducting capital gain tax and pay the resulting amount after deducting the amount of first installment.
5. In the final installment, paid on or before March 15, the full amount of tax is to be deposited (including capital gains tax) as reduced by amount in step 3 and step 4.
Surcharge, education and higher education cess should also be considered while calculating the advance tax liability.
Penalty in case of shortfall of advance tax payment
When filing returns, interest is calculated u/s 234A, 234B and 234C.
Under section 234A, the liability arises only when the return is filed after the due date.
Under section 234B, penalty arises when the total amount of advance tax paid along with the amount of TDS is less than 90% of the total tax liability. In such case interest is calculated at 1% per month of the amount of shortfall for time period from April to the month in which the return is filed.
Under Section 234C, there are three components. For the first installment, the shortfall penalty is calculated for 3 months @1% p.m. Similarly, in the second installment, the shortfall penalty is also calculated for 3 months @1% p.m and the final installment is calculated at a flat rate if 1% for 1 month only.
The best strategy for paying advance tax should be to pay a little extra for first 2 installments and then paying amount close to the total tax liability during the third installment. One should also try not to pay extra amount so as to avoid any hassles of refund as is it best to pay nominal interest amount later on.