Pay your first instalment now

The deadline for the first instalment of advance tax for financial year 2010-2011 is Wednesday — September 15. Businessmen and even salaried who have a tax liability in excess of Rs 10,000 on their other income need to pay advance tax.

Advance tax ensures you pay tax on income you are likely to earn in the same financial year. While employers deduct tax at source (TDS) on salaries, advance tax is paid on income that has not been subjected to TDS.

Calculating your advance tax liability
“At the start of a financial year, an individual must estimate his income using his prior experience to calculate the advance tax liability,” explains Homi Mistry, tax partner, Deloitte, Haskins and Sells.

Based on this, advance tax can be paid in three instalments. The assessee is expected to pay 30 per cent of the total tax payable by September 15, another 60 per cent by December 15 and the remaining 40 per cent by March 15.

Capital gains from mutual fund units, shares or property are considered only from the day the sale has been made. Say, you estimate your advance tax liability for the year at Rs 50,000. You sell a property on September 20, after you have paid the first instalment of Rs 15,000 on September 15.

In this case, your tax liability on capital gains, say Rs 40,000, will be added to your initial estimate (or outstanding amount payable), making your overall advance tax liability Rs 75,000.

Now, the tax amount payable before December 15 will be Rs 39,000. So, by December 15, you would have paid 60 per cent of your total advance tax liability.

When you miss the deadline
There is a penalty for missing the advance tax deadline. An interest of one per cent a month is charged on the outstanding amount.

Say, you need to pay Rs 10,000 advance tax before September 15, but you pay only Rs 5,000. You will have to pay one per cent, which amounts to Rs 50, interest on the outstanding amount of Rs 5,000 each month, till you pay the entire amount.

You must pay the outstanding amount as well as the next instalment before the next deadline of December 15 to avoid further charges.

When you pay extra
Don’t worry, the amount will be refunded once you file your returns. The amount will be returned within three-six months of filing the returns.

Also, you will be paid an interest on the excess amount at six per cent, calculated annually, till the refund comes. However, you will be eligible for this interest only if the excess amount paid is more than 10 per cent of the total advance tax paid.

If you find the process of paying advance taxes cumbersome, you should consider PS Nagaraju’s, director, etaxmentor.com, advice: Disclose your estimated income as well as investments for the year to your employer. He can deduct tax at source based on this information and you won’t be required to pay separately.”

Follow this or ensure you are diligent in paying the tax so that you don’t have to pay extra.