Why do i need to pay interest when at the time of advance tax due date, based on my estimated income there was no tax liability. Seems completely illogical that we consider based on tax liability at end of the year. It can happen that i don’t make anything in first 3 quarters like shown in this example. And also how is one supposed to pay 100% on 15th March when still 2 weeks are pending. Am i understanding this incorrectly because my CA said this is how calculation for interest shortfall on advance tax is done.
Your understanding is correct. This is how the interest on short payment of advance tax works.
I believe u r referring to your actual income (i.e losses) in the above example, not the estimate.
Govt wants u to pay advance tax based on estimated taxable income.
You can even call it guesstimate if u like.
Advance tax is paid purely based on estimates, i.e., u need to make a rough guess at the end of each quarter, as to how much u expect to make for the whole year.
This estimate can be right or wrong, but it will at least be a good starting point, as the year progresses (Q2, Q3, Q4) u can keep altering ur estimate by taking into account the actual profits/losses and re-estimate ur advance tax liability accordingly.
Assuming in Q1 u made a loss, it doesn’t mean u don’t need to pay any advance tax, actual profit or loss has nothing to do with advance tax calculation. U r expected to pay advance tax based on the estimated profit/loss.
If at the end of Q1, U estimate that u will be profitable by the year end, then u need to give that assumption a notional value and pay advance tax on that, i.e., u need to pay atleast 15% of such estimated annual net profit in Q1.
If you assume at the end of Q1, you will end up with a net loss for this year, u may avoid paying tax, and if ur estimate turns out right, u don’t have to pay any interest. But if your estimate turns wrong, then you can’t escape from the interest for short payment of advance tax.
These laws were introduced mainly for businesses , most businesses will make projections as to how much they expect to make next year etc, these projections can be right or wrong, but at the end of each quarter the owner will get an idea if they are getting close to their estimate or going away from it, and accordingly they will adjust their advance tax payment.
This logic may not apply for trading, but since FNO is treated as business income, there is no escaping from this interest on short payment of advance tax.
As mentioned above, u need to estimate how much more u will be able to make in the remaining 15 days and include that in ur tax calculation on 15th March.
You have 2 choices
If you don’t want to pay interest, pay more to the government and wait for the refund.
If you don’t want to lock ur funds by paying advance tax, as u think that u can put that money to better use and increase ur profits, then u can make less payment towards advance tax, but u should be ready to bear the interest burden for such short payment.
Thanks for the explanation, honestly this is just wrong seems like an easy way for govt to collect money as majority will end up paying interest anyways
yeah, if you pay too much you lose out as they only pay 6% interest after FY.
If you don’t pay or pay less or don’t know how much to pay, then they get 12% interest - win win.
They cant even wait until March 31 for 100% which is just pure bs.
I just consider it as another form of cess now. No way to predict trading income for me. What i do is pay for what i made so far minus some portion of possible future drawdawn.
out of topic - Much lower in worry list though. Indian regulators can anytime come up with something and all work must be done again. USDINR gone ! api ! fno !
In long run, probably we need to have investing system too i think - that should always be safe ( but no yearly returns probably )
I had exact same situation i.e. losses / less profit in Q1 to Q3 and then Q4 turned out to be more profitable. Ended up paying interest on advance tax.
It is unbelievable the way tax law is structured.
But at least, i was able to find a reference to situation similar to mine and know what community thinks.
Thanks tradingqna forum and contributors to this forum for it.
If any update on this thread (especially those of us with CA background) pl post here.
