Hey @Quicko,
I have some questions regarding your post (https://zerodha.com/z-connect/general/everything-about-advance-taxes).
In the above scenario, what if I make capital gains of another 100 Rs in Q3. That makes my total gains 250 Rs and my total tax liability 37.5 Rs.
Won’t that increase my advance tax liability in Q1 and Q2?
I paid 2.25 Rs advance tax in Q1 but would IT dept not expect me to have paid 5.625 Rs. (15% of 37.5 )? Will I have to pay interest on difference?
Hi @jagira
As per Income Tax Act, advance tax on Capital Gains is to be paid when you realise the profit since you cannot estimate capital gains like other source of Incomes. Thus, in your case, you will not be liable to pay interest penalty on the difference amount.
Thank you.
But the calculator for advance tax calculation on your website (https://tools.quicko.com/advance-tax-calculator/) changes advance tax liabilities for Q1 and Q2 when I add capital gains for Q3. 
IMO, the advance tax calculation shown in the example above for Q2 seems wrong.
Obviously, for capital gains, tax needs be calculated based on actual gains, rather than estimates.
Now, in the above example, the cumulative tax liability needs to be seen at the end of each quarter, which needs to be adjusted for any advance tax paid in previous quarter(s), to determine the actual advance tax to be paid.
If my gains in Q1 is ₹100 and Q2 is ₹50.
For Q2, the advance tax to be paid would be ₹7.875
i.e.,
45% of advance tax (-) advance tax already paid
Calculation:
Total gains at the end of Q2 (100+ 50) = ₹150
Total tax liability in Q2 = (₹150 *15%) = ₹22.5
Advance tax to be paid in Q2= [(22.5 * 45%) - Advance tax already paid in Q1]
(₹10.125 - ₹2.25) = ₹7.875
So when the gains increase subsequently, the advance tax liability of previous quarters will remain unaffected, however the advance tax payment needs to be adjusted and calculated based on the cumulative gains of all quarters, rather than considering only the gains of the current quarter.
This view would be correct for determining the advance tax liability for other sources of incomes other than capital gains. As advance tax (for eg: business income) involves payment based on estimates, unlike capital gains, which is calculated based on actual realisation.
Capitals gains schedule in ITR contains a table , which requires you to update the gains made in each quarter.
If this is filled properly, no interest or penalty would be levied for short payment of advance tax due to increase in gains in subsequent quarters.
Thanks. I will share this with my CA.
I guess this year we will have another input field in that table for gains made in Q2 after budget day.
Does the same logic of calculating advance tax for capital gains apply to dividend income as well? Because just like capital gains, there is no way to estimate dividend income.
That logic would apply for any income which can’t be reasonably estimated.
However, you don’t get to enjoy the exemption from interest/penalty levy, if there is any short fall in advance tax payment due to such unknown incomes (as per my knowledge)
That exemption is specific to capital gains.
But this uncertainty gets partly covered by TDS, mostly where the dividend exceeds ₹5,000 TDS gets deducted. so this TDS is in a sense advance tax payment.
At least 90% of your total tax liability as per the estimated income is required to be paid by the assessee. Failing to which results in interest at the rate of 1% on the unpaid amount till the date of payment.
So as long as 90% of the estimated tax is paid, we can avoid such interest, so this buffer of 10% would cover for any tax liability arising out of unanticipated income
This is probably additional interest over and above other interest. Otherwise who will pay each quarter ?
I pay slightly more than 100% by March 31. Still have to pay interest as each quarter advance tax has to be paid based on % of final income ( which is unpredictable for uncertain income).
Well, the law regarding interest on short payment of advance tax was brought mainly for businesses.
Most taxable incomes gets covered under TDS, so this TDS partly reduces the advance tax burden on such incomes. But profit from trading and capital gains have no TDS. so the burden is transferred to the individual to calculate the amount of advance tax to be paid.
It is a general assumption that any business should be in a position to reasonably estimate its revenue, expenses and profits to some extent.
Trading is a unique business/profession, that being said, if one wishes to avoid interest on short or delayed payment of advance tax, rather than paying nothing, some amount of advance tax can be paid for each quarter to avoid this penal interest to some extent.
As the year progresses, we might be able to adjust the advance tax payment based on the status in the current quarter. So even if u pay more in Q1, you can re-estimate it in Q2 and pay accordingly.
The problem arises only when u have losses in say first 2 quarters, but make huge profits in the next 2 quarters.
Now even though u had no taxable income in the first 2 quarters due to the losses, since your final tax liability at the end of the year will be more, you will be charged interest for such short/non-payment, if u miss to pay advance tax for Q1 and Q2. This although seeming unfair, is unavoidable.
Traders & investors: There’s a misconception that traders and investors can pay advance tax at the end of the financial year. In reality, it’s a quarterly obligation. Profits from trading or capital gains must be estimated and paid in instalments.
That must have happened for a lot of people in FY 2020. Losses in Q1 due to covid crash and profits in Q2/Q3.
Hi @SG_13,
Yes, your understanding is correct. We have calculated the advance tax liability for 2nd quarter, which will be 45% of the total tax liability.
However, the net tax payable will be determined after considering the tax paid in 1st instalment. Here’s an updated calculation that you can refer to.
