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Your guide to advance tax

June 09, 2009 11:47 IST

Each year, the newspapers carry notices issued by the income tax department to pay advance tax by 31st March. What is advance tax? What are its pros and cons?

Here we take a look at this tax that is a must for both individuals and corporates.

What is advance tax?

Advance tax is the income tax that is payable if your tax liability exceeds Rs 5,000 and should be paid in the same year in which income is received. Both individuals as well as corporates must pay this tax, irrespective of their residential status. This is applied especially when there are other revenue streams for an individual other than his income from his salary.

In case the individual's sole income is from his salary, then there is no cause for worry over advance tax payment, as it is taken care of by the employer as tax deducted at source from the salary.

For example  when there is income earned through capital gains, interest gained, lottery wins, from house property or from business, then it the concept of advance tax becomes relevant. It is also called as "pay as you earn" scheme, since you pay the tax in the same year in which you earn income.

Why was it established?

The aim of the Indian government behind setting up the advance tax system was to speed up the tax collection. This system also allowed the government to earn interest on the amount collected as tax, thus increasing funds to the government coffers.

How is this tax return filed?

In order to pay this tax, you need to fill and submit ITNS-270, available with the assessing officer of your circle.

Then draw a cheque with the amount payable in the favor of "Name of Bank / Branch -- A/c Income Tax" if you are depositing the cheque along with the challan in the bank and branch with whom you have no banking relationship or "Your Name - A/c Income Tax", if you are submitting the payment to your branch. 

In order to compute the tax payable, use the following table:

Date

Individual

Corporate

Up to 15th June

Nil

Minimum 15%

Up to 15th September

Minimum 30%

Minimum 30%

Up to 15th December

Minimum 60%

Minimum 60%

Up to 15th March

100%

100%

The payment can be deposited in RBI, SBI, IOB, Indian Bank, and other authorized banks.

I don't bank with these banks? What should I do?

Don't worry. As per RBI circular dated 14th May 2009. There are 926 branches all over India that have been entitled to accept the advance tax payments. Of these, 862 branches belong to public sector banks, 35 branches belong to HDFC, 19 are AXIS bank and 10 are ICICI branches. So you can walk into any of these branches to pay your tax.

What are the advantages and drawbacks of the scheme?

This scheme does have its own pros and cons.

Pros

  • Paying tax in advance frees you from the responsibility of paying tax
  • You avoid being penalized for defaulting on tax
  • Any rebate due to you fetches you interest on the amount due to you

Cons

  • Your funds are blocked if you are eligible for a tax refund, which is important factor for smaller companies as they suffer from cash flow problem
  • Failure to pay the advance tax, can attract penalty.

Will it help my business?

Yes, it is suitable for businesses. For one, it lets you adjust your cash flows as the amount left after paying the taxes can be used for business purposes. You also get an idea of your business income for the current financial year.

Advance tax is a very good concept, as it helps both the business and the government. However the problem is the slow refund process to get your refund. Speeding up the refund process will definitely help in increasing the advance tax collection.

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