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Tax Deducted at Source

Assessee pays tax in the assessment year on income earned in previous year. Due to this rule the tax collection is delayed till the completion of the previous year. Even sometimes people conceal their income and the tax is not paid at all. In order to overcome these problems, government started to deduct some amount of tax from the amount which is receivable by the assessee. The amount of tax so deducted is called as "Tax Deducted At Source" or TDS in India. Advance Tax In some cases, the assessee is required to make a payment of advance tax. Such taxes paid in advance are called prepaid taxes. Tax deduction is mainly done to reduce ones taxable income. In a way tax deductions can reduce the taxable income and thus provide tax relief. Tax deducted in this manner needs to be deposited in the Government treasury and assigned to the Central Government, within a stipulated time period. Indian Government is adhering to the policy of TDS to broaden its tax bracket in the country. Income gained through several sources falls under the tax deduction at source or TDS scheme. Some of such income that is subjected to Tax Deduction at Source is as follows: Salary. Interest. Rental fee. Interest on Securities. Insurance commission. Dividends from shares and UTI/Mutual Funds. Commission and brokerage. Prize money won from lotteries, horse races, etc. Payments to non-resident sportsmen or sports associations. Commission on sale of lottery tickets. Fees for professional and technical services and the like. Compensation for compulsory acquisition. Income from units of an offshore fund. Income from foreign currency bonds or shares of Indian Companies (unless specified as tax-free).

Difference between TDS and Income Tax

Before we dwell further on TDS and income tax, let us see what is Income Tax. Based on the strength of an act passed in the Indian Parliament called the Income Tax Act, anybody who earns an income in India is liable to pay an income tax. The Geographic limit or boundaries of India are not the limiting criteria to deem the income as income earned in India. Some time even income earned outside the country can be categorized as Income earned in India. The difference between TDS and Income Tax is as follows : Although TDS is a part of the Income Tax that has to be paid by an assesse, it is deducted by a third party, basically an entity that is going to make you some payment. And this entity deducts the TDS from payments due to the payee and deposits it with the Income Tax Department on behalf of the payee. The income tax that is paid to the income tax department by you in person is the amount that is arrived at after assessing your total income for the financial year. This is filed with the Income Tax Department as advance Tax.

If TDS is less than the tax payable for the financial year, then you have to pay the tax on the additional income also, and if the TDS is more than the tax that has been made liable to you, in that case the Income Tax Department will make the refund from the TDS that has already been paid in excess. Income Tax has to be paid only once in the year where as TDS may have to be deducted a number of times depending on the type of payments and parties involved. To file TDS we need to use challan - 281 and in the case of Advance Tax we use challan - 280

What is advance tax ?

The Income-tax Act has a provision wherein each assessee is required to pay tax in advance if the total estimated tax for the year exceeds INR 5,000. So for example for the PY if your tax on estimated income exceeds INR 5000 for the previous year 200708, you must pay tax in installments during 2007-08. In the case of individuals, advance tax is normally suppose to be paid as follows: 30% of the estimated tax - 15 September 2007; 60% of the estimated tax - 15 December 2007; 100% of the estimated tax - 15 March 2008. In the event of you not complying with the above provision, you will be charged interest under Section 234C. Note that there is not penalty for non-payment.

How is Advance Tax different from Self-assessment Tax?

Paying income tax is tedious enough. To top it, there are various heads under which the tax payment is made. Two of these heads are: 1. Advance tax 2. Self-assessment tax (tax you have to pay while filing your returns) Lets look at an example: Ankit is a professional. He earns income through his sole proprietorship business. The income is earned throughout the year and there is also some tax deduction at source on the payments received. Ankit has made a payment of Rs 40,000 as advance tax in March this year. Earlier in December, he paid Rs 30,000. These two payments were advance tax payments. Ankit has already made payment towards advance tax. Will this mean there is no self-assessment tax to be paid by him at the end of the year? Payment of advance tax is a requirement that cannot be avoided. This tax is paid in advance by estimating the income that will be earned during the year. When you have to pay more than Rs 5,000 as tax, payment of advance tax becomes compulsory. Penalty for not paying the advance tax: The IT department charges an interest. Not just professionals but salaried people also need to do this kind of working to ensure that there is no tax outstanding.

If you are a salaried person there is tax deduction at source (TDS), which takes care of the tax payments for your salary. At the same time, there will be additional liabilities for income like interest on deposits, bonds and even capital gains which might require you to pay advance tax. Can there be a situation where more additional tax has to be paid and how will he come to know of this payment? Advance tax has to be paid in several installments in September, December and March. That is, you need to estimate your income and pay tax every quarter, and the entire tax that is due would have to be paid by March 15. As far as Ankit is concerned, even though hes paid two installments of advance tax amounting to Rs 70,000, hell know if hes paid adequate tax only after the financial year is complete. Is there a specific date for payment of the self-assessment tax and how does one tackle this situation? If the actual income of Ankit is higher than the estimated and the total tax liability comes to Rs 80,000, he will have to pay an additional Rs 10,000 as self-assessment tax. This is the tax paid before filing the income tax return. Calculate self-assessment tax: The difference between the tax paid and the tax payable becomes the selfassessment tax to be paid. You can figure out the self-assessment tax figure when you make the final income tax calculation. There is no specific date for paying this tax but it has to be done before you file your income tax return so that no further amount of tax remains to be paid.


Obligation to pay Advance Tax - sec. 210 Apart from making provisions for deduction of tax at source on various income based upon quantum of income, the Indian Income-tax Act makes it compulsory for every person liable to pay tax in India, to pay Income-tax in advance on the income of the current financial year. However no such advance tax is payable unless the tax payable is Rs. 5000/- or more after deducting the tax deducted at source from the gross tax payable on the current income.

PAYMENT OF ADVNCE TAX ON THE ESTIMATED TAXABLE INCOME BY ALL ASSESSEE (Other than companies) Due Date 15th September 15th December 15th March

Installment First Second Final

Percentage 30% 30% 40%

Eg.: If an Assessees estimated tax payable for the full year is Rs.10,000 , he has to pay an Advance Tax of Rs.3,000 each in 1st & 2nd Installment & Rs. 4,000 in Final Installment. No Advance Tax need to be paid, if total tax payable for the year is less than Rs. 5,000. When employer deducts tax from Salary, employee need not pay Advance Tax. Non-payment or short payment of Advance Tax will attract penal interest.

Advance Tax Example : Mr. Sanjay estimates his income for the year 2007-2008 as on 1.9.2006. Details : Business Income 2,50,000 Interest from Bank & NSC 15,000 PPF Contribution 4,000 Life Insurance Premium 6,000 ELSS 10,000 TDS on Interest 1,100

Solutions : Taxable Income : (1&2) Rs. 2,50,000 + 15,000 = 2,65,000 (3 to 5) Rs. 4000, 6000, 10000 = (-) 20,000 = 2,45,000 Tax on 2,45,000 including EDU Cess @2% 24,480 Less : TDS on Interest 1,100 Total Tax Payable 23,280

Installment of Advance Tax Payable 1 st. - 30% on 23,380 payable on 15/09/06 7,014 2 nd. - 30% on 23,380 payable on 15/12/06 7,014 3 rd. - 40% on 23,380 payable on 15/03/07 9,352 Interest for short or non-payment of Advance Tax - sec.234B (b) If no advance tax is paid at all or if the aggregate of the tax paid by 31st March of the current financial year is less than ninety percent of tax determined as payable by the tax payer on completion of the assessment then interest @ 2% p.m. and at 1% from 1-6-1999 is charged on the deficit amount from 1st April of the following year upto the date of the assessment.

In the example given under (a) above, if the net tax payable on assessment is increased to Rs. 11000/- then interest will be payable under (b) above since the total tax paid is Rs. 9500/- which is less than 90% of Rs. 11000/- which will be Rs.9900/-.Interest payable will be 2% p.m.on Rs. 1500/- (Rs.11000-9500) and it will be payable from 1-4-1996 till the date of completion of the assessment. [In addition to interest payable as refered to above, for deferment of advance tax and for non or short payment of advance tax, interest is also payable for non-filing or delayed filing of return of income. (Sec. 234A) ]