Get ready to pay a stiff interest rate of 1% per month if you didn’t pay “advance tax”

The advance tax shock

Recently, as I prepared to file my tax returns, I got a shock as my CA told me that I owed the government a largish sum of money as interest for not having paid “advance tax”. I had no idea I was supposed to do that.

Here’s what I learned

To pay for the expenses of running the country, the government collects taxes. Since the expenses happen through the year, these taxes need to be received through the year and not at the end (when we file our returns). This is why the company deducts TDS on our salary income every month.

While companies typically do a good job of deducting the right amount and paying the government on time, the responsibility for doing the same for our “non-salary” income falls squarely upon us.

What is non-salary income?

It’s highly likely you have some non-salary income. Here are some examples:

  • Bank interest: Diligently keep track your bank statements to see how much interest income you got through the year. These typically appear as “Credit Interest” on your bank statement. You need to know how much interest you got from FDs Vs. from savings accounts. While interest on a savings account is exempt from tax up to Rs 10,000, interest on FDs is fully taxable.
  • Capital gains on the sale of assets: Every time you sell a share of a company or units of a mutual fund, keep track of those statements from your provider. You need to keep track of gains vs. losses as well as whether these were short-term (1 year for equity mutual funds, 3 years for debt mutual funds) or long-term.

Ok, so what do I need to pay and when?

You need to watch out for 4 key dates throughout the year – 15 June, 15 September, 15 December and 15 March and pay Advance Tax. Of your total taxes, you need to pay an “advance” of 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.

You’ll need to estimate your tax bill on your non-salary income, and then judge if you actually need to pay something or not. Typically 15 March is when a payment becomes due so that you don’t get penalized by the government. You can pay via Net Banking – you just need to save the PDF challan that’s generated.

What if I don’t pay advance tax on time?

You’ll end up paying a pretty hefty 1% interest a month (almost like a credit card!) to the government. When you file a return, you’ll get a shock (like I did) and wonder what you could’ve done to save this. The only way is to diligently keep track of the four advance tax deadlines and make sure you’re on the right side of those percentages at all times.

How do I get help?

The DIY approach is to be diligent, maintain a spreadsheet and estimate your taxes every month to see what you owe has actually been paid.

The do-it-for-me approach is to find a Chartered Account (CA) and get him or her to keep track of this for you. While it might be irritating to exchange e-mails with your CA throughout the year, you’ll be happy that you saved interest.

Note: Scripbox gives you a capital gains statement divided by quarters aligned to advance tax payment dates. So at least your mutual funds capital gains are clearly available to you for calculating your advance tax liability.