Do you have to pay advance tax?

March 15 is the date for payment of advance tax.

Which brings us to the questions: What is advance tax? When is it paid? Who pays it?

When is it paid?

As the name suggests, advance tax is nothing but tax paid in advance.

Advance tax benefits both the taxman and the taxpayer. The latter gets to pay in installments and does not have to shell out a huge amount in one go. The taxman can collect his dues over the year and does not have to wait till the end of the year.

Where an individual is concerned, the tax must be paid in three installments. For a corporate, it is four.

Over here, we will only view it from an individual's point of view for the financial year 2005-06.

Tax paid before March 31 is treated as advance tax paid during the financial year. So all tax paid before March 31, 2006, is treated as advance tax paid during the financial year 2005-06.

If the last day of payment of advance tax is a bank holiday or the banks are shut for some reason, then the payment can be made on the next working day.

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Who pays it?

Advance tax is paid on any income, irrespective of whether you are a consultant or a salaried individual. Income through capital gains, interest earned, winnings from lotteries, income from house property or income from business are all liable for advance tax. 

If the tax payable is Rs 5,000 or more, it is obligatory to pay advance tax.

If you are a salaried individual, there is no need for you to worry because the company will automatically deduct your tax. This is known as Tax Deducted at Source.

How is it computed?

You have to take an estimate of your income. The tax is calculated based on that. As mentioned above, you as an individual will have to pay up to 30% of the advance tax on or before September 15; up to 60% on or before December 15; and 100% on or before March 15.

When paying advance tax, there is no need to submit any statement regarding the actual income.

The tax has to be calculated at the rates applicable for the financial year. So, taking the above example, the rates applicable to FY 2005-06 will apply.

After paying the first installment of advance tax, the individual can revise the remaining installments. This is specially applicable in the case of business income as it may increase or decrease. Based on this, the adjustments can be made in the remaining installments.

Let's say the total tax you have to pay in the year, according to your calculations, is Rs 1,00,000. So, by September 15, you will have to pay 30% of the tax, which is Rs 30,000. By December 15, it is around 60% of the tax, so you should pay another Rs 30,000 to cover Rs 60,000 (60% of Rs 1,00,000). You should pay the balance Rs 40,000 by March 15.

Now, let's say you pay less in the first installment because, according to your calculations, you expected less income. But, for various reasons, your income is now working out to more than what you estimated. For example, you may have decided to sell some of your shares after the Sensex touched 10000, or you may have decided to sell some of your ESOPs (now this was something you had definitely not planned on in the beginning of the financial year).

You can increase the amount of advance tax you pay in the next two dates. But you will have to pay interest of 1% per month on the outstandings. It may sound unfair, but that's the way the law stands.

Or, if you don't pay any advance tax by September 15 but make the entire payment on December 15, interest will be payable at 1% per month for the three months from September 15 to December 15.

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What happens to salaried employees?

The question is what happens on the other income earned like capital gains on the sale of shares or mutual fund units and interest income? Does the employee have to pay for this separately?

As a salaried individual, you find that your employer has deducted the exact amount of tax at source from your 'salary income.' You can request the employer to deduct more because you have to pay advance tax on income from other sources.

To do this, you must fill a form with your employer, declaring all your 'other income.'