You would have heard about companies paying advance tax at periodic intervals. This tax is not for corporate entities alone, but is equally applicable to individuals like you.
For a majority of us, our employer will deduct tax at source. You may have made declarations on investments in tax saving instruments to your employer, who would then deduct TDS accordingly.
But you may also have other sources of income such as capital gains from trading in shares or mutual funds, rentals, which you may not have disclosed to your employer. When such income is added to your salary, your tax outflow is likely to be higher than what your employer would have deducted.
Now, the principle of paying taxes works on a pay-as-you-earn basis.
If your tax liability, net of TDS is likely to exceed Rs 10,000, then you would be better off paying advance tax.
From the current financial year, the advance tax clause does not apply to senior citizens, who have income from pensions or interest from deposits and other sources, but no business income.
Penalty
Generally, advance tax payment must be done by the 15{+t}{+h} of September, December and March every year. The proportion is 30 per cent of the total tax for the year, 60 per cent and 100 per cent respectively. If advance tax paid in the first two instalments is less than specified, simple interest at 1 per cent per month is charged on the deficit amount for a period of 3 months.
A penalty is payable in case of failure to pay advance tax. Under section 234B, if the tax already paid, along with any advance payments, is less than 90 per cent of your total liability as at the end of the financial year, interest is charged at 1 per cent a month till the time of payment of such a shortfall. If you pay it only when you file your returns in July, then the interest could be payable for four months. An example will make this clear.
Let us assume that your total tax liability is Rs 75,000 for 2012-13. If the tax deducted by your employer and the banks on fixed deposits is say Rs 60,000, then your remaining liability is Rs 15,000. Also, let us say you have paid advance tax of Rs 2,500. Since the total tax that you paid is less than 90 per cent of your liability, there will be a penalty. At the time of filing returns in July, your penalty under section 234B would be 1 per cent interest on Rs 12,500 for four months (April-July 2013). So the penalty would be Rs 500 (1 per cent of Rs 12,500 multiplied by four). But if no advance tax is paid despite higher liability, then under section 234C, interest at the rate of 1 per cent a month on the shortfall for three months in the first two instalments (September and December) and for one month in the last instalment is payable.
Under 234C, the penalty would be Rs 555, with the calculation being a little bit more involved.
So you will have to pay Rs ,1055 along with the Rs 15,000 at the time of filing returns.
One possible way of avoiding this penalty is to disclose all sources of income to your employer and have the company tax your full income according to your slab.
Alternately, ensure that you make advance tax payments by anticipating your likely income so that the total liability at the time of filing remains less than Rs 10,000.