Do remember to pay advance tax by Dec 15

If advance tax is not paid, penal interest under section 234B and 234C is applicable

Advance Tax is your tax liability calculated in advance. If your tax liability in a year is more than Rs 10,000, then the IT department wants you to pay tax on your income at regular intervals, instead of a lumpsum payment at the year-end. You must pay 100 per cent of your tax liability by March 15, 2016. Here is the payment schedule for advance tax:

Several tax payers are unsure whether advance tax is applicable to them or not. If TDS takes care of most of your taxes, it is likely you have no advance tax liability. Usually salaried individuals do not need to worry about paying advance tax as the employer already deducts TDS on one’s salary, and deposits it with the government. However, if you have income which can trigger a shortfall in taxes deposited against your PAN, you must pay advance tax.

This shortfall may arise due to taxable capital gains during the year, or rental income which you may have earned and not disclosed to your employer, or if you have a large interest income. If no TDS has been deducted on these incomes, you may have an advance tax liability, and if you do not pay these, you may have a tax shortfall at the year-end.

What about freelancers?

In the case of freelancers, TDS may not have been deducted on their receipts or where TDS deducted on it may not be sufficient to meet their tax liability. For freelancers, advance tax is almost always applicable. In all likelihood, freelancers will have tax liability outstanding when they estimate their taxes, and this must be paid as per the schedule specified by the income tax department.To pay advance tax you have to estimate your annual income. On such estimated annual income, tax has to be calculated in the usual manner.

Here’s how a freelancer can calculate Advance Tax:

Estimate your freelancing income:  Add the expected income from your clients. If you have ongoing agreements which lay out payment terms, use those for estimating your income.

Subtract expenses: From this income, you are allowed to reduce expenses which are directly related to the freelancing work. Rent of your workplace, internet, telephone costs, depreciation on computers, and travel expenses, etc.

Add up all other income: Add expected income from other heads like House Property, Interest Income, etc. Apply the latest Income Tax Rates to calculate your tax due. Do remember to reduce any TDS that may have been deducted from your Income.

If the remaining Tax Due exceeds Rs 10,000, you are required to pay Advance Tax as per the due dates mentioned above.

When advance tax has not been paid as per the instalments, penal interest under section 234B and 234C is applicable. Interest is calculated at one per cent simple interest till the date of actual payment of outstanding taxes.

Note that no interest is payable if there is any shortfall in payment of advance tax due to: underestimation or failure to estimate amount of capital gains or speculative income (lottery income, gambling income etc.); and the taxpayer has paid in full, any tax payable on the income mentioned above. If this tax has been paid while paying the remaining instalments of the advance tax due, or if no instalment is due, the taxpayer pays them before the end of the financial year. Senior citizens, those who are 60 years or older and do not run a business, are exempt from paying advance tax.

Note that you don’t need to submit any income details or supporting documents along with this payment of Advance Tax. No paperwork is required; you only need to pay the amount which is due.

(Preeti Khurana is a Chartered Accountant and  Chief Editor at www.cleartax.in, a tax e-filing website for individuals and businesses.)