The Taxation system in India is one of a kind. It includes its fair share of interesting and complex provisions and sections to reckon with. One of the provisions is payment of Advance Tax. The concept of Advance Tax includes depositing tax on income in advance by estimating the projected earnings of the year and then paying taxes accordingly on time bound intervals instead of lump sum payments at year end.

The concept of Advance tax has been helping both the government and the taxpayers as there is a lesser chance of default in tax payments and collections which ultimately expedites the revenue collection mechanism of the Government. In fact, the Government can also earn additional interest on advance receipt of taxes. In addition to that, it eases the burden of the taxpayers as taxes are paid in instalments and not in lump sum. It thus helps Government, businesses and individual taxpayers to manage their revenue and finances systematically.

What is Advance Tax and why Cryptocurrency Traders and Investors should be aware?

To explain simply, Advance Tax is similiar to the TDS deducted by the employer in your payslip. 

Technically, Advance tax refers to tax deposited by a taxpayer with the Income Tax Department during the Financial Year without waiting for the end of the Financial Year. This is to ensure that the Income Tax Department is able to collect taxes uniformly throughout the year.

Section 208 of the Income Tax Act, 1961 includes the provisions pertaining to Advance Income Tax which stipulates that where, total Income Tax Liability of a taxpayer is greater than INR 10,000, then tax is to be deposited under Challan ITNS 280 via online or offline mode with designated banks by the Income Tax Department. Interestingly, the concept of paying taxes online in India is on the rise as more than 85% of transactions are now done via online mode.

It DOES NOT MATTER if you as a Cryptocurrency Traders and Investors have not made any withdrawals to your bank account

Who is liable to pay Advance Tax?

Advance tax is required to be paid by all taxpayers including salaried, freelancing, Stock Traders, Cryptocurrency Traders / Investors, professional and senior citizen taxpayers who have a tax liability of greater than INR 10,000 during the year.

Following assessees are EXEMPTED from paying Advance Tax:

1. Senior citizens (above the age of 60 years) and Super Senior citizens (above the age of 80 years), who are not running any business.

2. Salaried individuals whose Tax is already Deducted at Source (TDS). However, they are still required pay Advance Tax on Income from Other Sources such as Interest, Capital Gains, Rental Income and other non-salary income.

3. If the TDS deducted is more than tax payable for the year, which mean the taxpayer is eligible to claim refund and not actually pay any tax in advance.

What is the due date for depositing Advance Tax payment?

• 15% advance tax, on or before 15th June

• 45% advance tax, on or before 15th September

• 75% advance tax, on or before 15th December

• 100% advance tax, on or before 15th March or closing of FY

Now let us look at a couple of important rules of Advance Tax by way of basic examples:

• Advance Tax on Capital Gains: Advance tax is required to be paid on capital gains. However, since the taxpayer cannot estimate the exact amount of capital gain in advance, the Income Tax Department allows the taxpayer to pay the advance tax in the next instalment in case capital gains arises after the above-mentioned due date of payment of advance tax.

Example: Mr. X’s total tax liability for FY 2019-20 is INR 10,950/-. In addition, Mr. X has sold a property and earns long term capital gains on 17th December. Now since Mr. X could not know the exact date and amount of capital gains at the beginning of the year, the Income Tax Department allows Mr. X to deposit the tax liability on such capital gains before the deadline of 31st March of the current FY.

• Advance Tax on Presumptive Income under section 44AD: Any taxpayer carrying business under the presumptive taxation scheme is eligible to pay the Advance Tax in one instalment by 15th March of the current financial year.

Example: Mr. X’s total tax liability for FY 2019-20 is INR 11,820/- and he carries on a business and has opted the presumptive scheme of taxation, thus he is eligible to deposit the whole liability of tax before 15th March of the current FY, as opposed to paying it in the early instalment dates. This has been introduced to facilitate the ease of doing business in India.

How to calculate Advance Tax?

1. Step-1: Estimate your Income: Advance Tax calculation is based on an estimate of income. The various heads of income that need to be considered are: Interest income, Capital Gains, Professional Income, Rental income and any other income that is likely to accrue during the year.

2. Step-2: Add Salary Income: if any, to the above to determine the Gross Taxable Income. It is important to note that while Advance Tax is not payable on Salary (due to TDS already deducted), the sum of Salary and Income from Other Sources (as mentioned above) may change the applicable tax slab and result in additional tax liability.

3. Step-3: Slab Rate: Apply the latest applicable Income Tax Slab rates which can be obtained at income tax website

4. Step-4: Subtract TDS deducted: that is already deducted or is likely to be deducted as per TDS slabs applicable for various types of income.

5. Step-5: Pay Advance Tax: In case the final Tax Liability after deducting TDS is more than INR 10,000 then then tax is to be deposited under Challan ITNS 280 via online or offline mode on NSDL website.

Advance Tax Calculator

You can use the Advance tax Calculator on the income tax website. Here is the link for the same.

https://www.incometaxindia.gov.in/pages/tools/advance-tax-calculator.aspx

How to pay Advance tax?

Advance Tax can be paid by a taxpayer through any one of following modes:

1. Online Payment: through Net Banking or on Income Tax Departments website (https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp)

2. Paid Through Bank: Advance Tax can also be paid through specified branches of nationalized banks by the Income Tax Department. A Challan ITNS 208 is required to be filed by the taxpayer specifying his Permanent Account Number (PAN), Name, Assessment Year (AY) and Amount of Tax to be paid for the current Financial Year (FY). Bank returns copy of the challan to the payer affixing its stamp as duly paid. It is suggested to keep this challan for taxpayer’s personal record for at least 8 years.

What is the penalty and interest charge of non-payment of Advance Tax?

1. Interest under section 234B: In case the taxpayer fails to pay Advance Tax or tax already paid is less than 90% of the assessed tax, then a simple interest at 1% is levied every month on the amount not yet paid.

2. Penalty under section 234C: In case the taxpayer fails to pay advance tax instalment on time, then a simple interest of 1% is levied for the next 3 months, i.e. till the next instalment date on the amount of shortfall as a penalty. This penalty levied is only on account of delay in paying the due advance tax.

Therefore, as explained above, it is important for the taxpayer to be alert about their Advance Tax liability in order to avoid penalties and interest charged by the Income Tax Department, in case of non-compliance with the rules and laws as laid down under the Income Tax Act, 1961. This is pertinent to increase transparency and honest collection of taxes by the Government of India for the relative growth of our country.