The drawback of incorrect estimation of earnings earlier than 15 March

The Income Tax (I-T) Act prescribes cost of advance tax if the tax legal responsibility (after tax deducted at supply, or TDS) on the estimated earnings for the monetary yr (FY) exceeds ₹10,000.

The advance tax should be paid by the taxpayer in 4 instalments—at the least 15% of the advance tax legal responsibility by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.

The quantity payable in every instalment is the due quantity minus the quantity paid till the earlier instalments. (see chart for an instance on the advance tax instalments due and that paid for an estimated earnings of ₹30 lakh each year of a freelancer).

However, there are situations when earnings estimates can go incorrect. In such instances, crucial changes to the advance tax funds—shortfall or the additional cost —may be made within the remaining instalments.

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“The authorities expects that taxpayers would estimate their earnings tax legal responsibility on a periodic foundation through the related monetary yr and pay the earnings tax legal responsibility upfront, making use of the idea of ‘pay as you earn’,” stated Shailesh Kumar, associate, Nangia & Co LLP.

While this can be a truthful ask, what bothers most taxpayers is the levy of curiosity, on any sudden earnings earned within the final quarter, from the start of the monetary yr.

In the case of sudden earnings, the advance tax instalment dues additionally get revised. If this isn’t paid,curiosity on the fee of 1% monthly is charged for every quarter on the differential quantity. This is as per Section 234C of the I-T Act.

Note that the curiosity below part 234C doesn’t come up if the shortfall in cost of advance tax is because of failure to estimate earnings from capital positive aspects or the earnings generated from profitable lotteries, crossword puzzles, or dividend earnings.

The curiosity below part 234C is relevant solely until 31 March of an FY.

After 31 March, and until the date of cost of the differential quantity of tax, curiosity below part 234B kicks in.

Interest below Sec 234B can also be calculated on the fee of 1% monthly and is payable on the shortfall after the top of the monetary yr (from 1 April of subsequent the FY) until the date of cost/submitting return. This curiosity comes into the image provided that the whole advance tax paid is lower than 90% of the tax legal responsibility on the finish of the FY.

Difficulty in estimating

Many specialists acknowledge that estimating earnings precisely is a tough job for a standard man.

Aarti Raote, associate from Deloitte India, believes that estimating accrued earnings from frequent sources like mounted deposits is tough for the peculiar taxpayer.

“The particulars of earnings and taxes can be found within the Form 26AS. However, the 26AS for the final quarter is up to date solely post-May. Hence, figuring out the earnings and taxes precisely at the least for the final quarter is a problem for a lot of,” she added.

“Taxpayers with skilled earnings have the hardest job in estimating their earnings because the books of accounts for them can be out there solely after 31 March after reserving all bills,” stated Akhil Chandna, associate, Grant Thornton Bharat.

To present some reduction to taxpayers, some chartered accountants say that the due date for paying the final instalment of advance tax must be deferred from 15 March to fifteen April of the following FY.

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