Interest on Advance Tax

SG_13 · September 16, 2024, 5:27pm

Advance tax calculation for Capital Gains

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.

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.