Countdown To ITR Filing Due Date–September 15: Top 10 Mistakes Taxpayers Make While Paying Advance Tax

As the second installment of advance tax falls due on 15 September, taxpayers must exercise caution to ensure timely and accurate compliance. Advance tax is a critical obligation under the Income-tax Act, 1961, and errors in its computation or payment often result in interest consequences. In this regard, the following are the common mistakes that taxpayers should avoid.

Incorrect Estimation of Income: Many taxpayers fail to account for all income sources, such as capital gains, interest, rental income, or freelance receipts, while estimating advance tax. This may lead to underpayment and interest liability under Sections 234B and 234C.

Liability to Pay Advance Tax: Taxpayers are often not aware of their advance tax liability. In accordance with section 208 of the Income Tax Act, 1961 (hereinafter referred to as 'the IT Act'), every person whose estimated tax liability for the year is Rs. 10,000 or more shall be liable to pay advance tax. However, resident senior citizens aged 60 years or more during the relevant financial year and not having any income from business or profession would be exempt from payment of advance tax.

Late or Non-Payment of Installments: Advance tax is payable in four installments (15 June, 15 September, 15 December, and 15 March) as discussed below. Missing installment timelines or paying lump sums at year-end attracts avoidable interest charges.

Overlooking Interest Implications: Ignoring the impact of Sections 234B and 234C leads to unnecessary penalties. Taxpayers failing to pay their advance taxes in due time would be subject to the following interest consequences: -

Interest u/s 234B of the IT Act

A taxpayer who is liable to pay advance tax u/s 208 of the IT Act and has either failed to pay the advance tax or the advance tax paid by the taxpayer is less than 90% of the assessed tax would be liable to pay simple interest at 1% per month or part of a month for default in payment of advance tax.

Such interest would be computed from the first day of the assessment year, i.e., from 1st April till the date of determination of income under section 143(1) or when a regular assessment is made, then till the date of such a regular assessment. It is pertinent to note that any tax paid till 31st March will be treated as advance tax.

Further, interest would be calculated on the amount by which the advance tax paid falls short of the assessed tax. However, in case the advance tax is not paid at all, the interest would be computed on the entire assessed tax.

Interest u/s 234C of the IT Act

Section 234C of the IT Act provides for the levy of interest for default in payment of installment(s) of advance tax. Such interest would be levied @ 1% simple interest per month or part of a month for short payment/ non-payment of individual instalment(s) of advance tax. Interest u/s 234C in case of deferment of different instalments of advance tax would be levied as follows:

Factoring Capital Gains and Windfall Income: Short-term capital gains, sale of property, dividends, and other windfall gains are often overlooked while projecting income. These items must be factored in when computing advance tax liability. However, relaxation has been provided where the shortfall arises on account of unforeseeable incomes such as capital gains, dividend income, winnings from lotteries, etc.

In such cases, no interest under Section 234C will be charged if the taxpayer pays the entire tax liability on such income as a part of the immediate following instalments of advance tax (or by 31st March of the financial year, where no instalment is due)

Presumptive Taxation: In case of taxpayers opting for presumptive taxation scheme u/s 44AD or 44ADA of the IT Act, Section 234C interest shall be levied if advance tax paid on or before 15th March is less than 100% of advance tax payable.

Not Considering Deductions and Exemptions: Some taxpayers compute advance tax on gross income without adjusting for eligible deductions (e.g., under Chapter VI-A) or exemptions. This inflates liability and results in excess tax outflow.

Missing Out on Relief under Section 87A or DTAA: Eligible taxpayers frequently forget to apply the rebate under Section 87A, or to adjust for relief available under Double Taxation Avoidance Agreements, leading to overpayment.

Incorrect Use of Challan ITNS 280: Errors such as selecting the wrong assessment year, using the wrong minor head code (self-assessment tax instead of advance tax), or wrong PAN details result in a mismatch and denial of credit. The correct minor codes to be selected are minor code 0020 - Income-Tax On Companies (Corporation Tax) and minor code 0021 - Income Tax (Other Than Companies).

Not Factoring in TDS/TCS Credits: Tax deducted at source (TDS) or collected at source (TCS) should be adjusted before calculating the advance tax liability. Overlooking this often leads to duplication of payment.

Failure to Revise Estimates Mid-Year: Advance tax liability must be re-estimated each quarter based on actual income trends. Continuing with initial projections, despite significant changes in income, may lead to a shortfall or excess payment.

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