Startups: Have you paid your Advance Tax? [Legal Resources for Startups]

What is advance tax?

Tax collection is one of the major tasks for the Government every year. In order to make its life easier, the government has devised several mechanisms. One of them is TDS (tax deduction at source). It helps to simplify procedures for the collection of tax. It also importantly increases the chances of compliance.

Another measure introduced by the Government which we shall be examining here is the concept of Advance Tax. As suggested by the phrase ‘advance tax’, it means that you have to pay a part of your annual tax liability in advance.

Pay-as-you-earn

Advance tax has to be paid in the year in which you earn in the income. Additionally, it has to be paid before the end of the assessment year. As a result, it also referred to as ‘pay-as-you-earn’ taxation.

Everyone does not have to pay advance tax. It is only applicable on sources of income other than your salary. This includes earnings through a house property or business, interest earnings on investments, income from a lottery and capital gains.

Illustration:

I work with a large company (say Infosys) and earn Rs. 50,000 per month as my salary. I also have a house in Bangalore from which I earn Rs. 20,000 per month as rental income. Do I have to pay advance tax?

Yes, you have to pay advance tax but not on the entire amount of Rs. 70000 per month. You only have to pay advance tax on Rs. 20, 000 which is your rental income (also known as income from house property).

For entrepreneurs and self-employed businesspersons, paying advance tax is a must. We as entrepreneurs do not earn a salary, unless you have a formal arrangement with your company by which you earn a salary from the company. As businesspeople, you have to file for advance tax.

Why is salary exempted? The major reason is that tax on salary is already deducted at source. The need to pay in advance does not arise because the Government (literally) gets its share before you do!

What is the procedure to file advance tax?

For individuals and entrepreneurs (except entrepreneurs having private limited companies), you have to file advance tax by the 15th of September, December and March. You have to pay 30 per cent of your total tax liability by the 15th of September, another 30 per cent by the 15th of December and the final 40 per cent by the 15th of March.

For private limited companies, advance tax needs to be paid, in addition to the above dates, on the 15th of June as well.

To pay advance tax, you have to use the tax payment challan available at the bank branches empanelled with the Income Tax (I-T) department. Apart from the Reserve Bank of India, the State Bank of India, ICICI Bank, HDFC Bank and Indian Bank are some of the authorized banks. In all, there are almost 930 branches across India accept advance tax payments. Online payment is also possible on the Income Tax Department site or the National Securities Depository Site.

Please note: If your tax liability from sources other than your salary is more than Rs. 10000 and you have not paid advance tax, pay it immediately. The due date has already passed! If you do not pay your advance tax on time, you will be charged at the rate of 1% every month, or 12% per year.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).]