Tax Liabilities for Salaried employees do not end at TDS

There is a misconception in all individuals including salaried employees whose tax liability after deduction of their TDS during the financial year is more than Rs10,000 hence, they are not liable to pay advance taxes. They sit relax on that TDS has to be deducted by their employers on their salary earned during the financial year. But, they do not know that their full tax liability does not end without paying advance tax.

Let’s understand that what makes the difference between Advance tax and TDS. As far as only salary income is concerned, TDS is to be deducted by any employer or whatever any source of income you are deriving, tax on the same is deducted month after month by your employer; hence, you have no obligation, nor liability, nor responsibility to make payment of any advance tax. But what would happen, if you have income from other sources like bank interest, dividend or other investment income, even if rental or business income, then it is sure that you would come under ambit of advance tax provisions.Read also: Nitty-gritty of your taxable Pay Package!

To get better understanding of advance tax provision, we take the examples of two salaried individuals who earn by way of interest income from fixed deposits (which is the most likely) and rental income itself.

Case 1: Mr Pravesh has annual taxable salary of Rs 4.50 lakh and he falls in the lower tax bracket of 10%. He has invested Rs 5 lakh in Bank fixed deposit which fetches him interest of 9% pa every year and also his annual taxable rental income is Rs2 lakh.

For taxable salary income of Rs4.5  lakhs, his employer deducts  monthly TDS of Rs25,750 and remits the same to the income tax department and hence, Parvesh need not to be worried about advance taxes on his salary income. For interest income, his banker also deducts TDS of Rs4,793 at the rate of 10.3% and deposits the same on behalf of Parvesh to income tax department. 

Tax implication of Parvesh’s Case

By the provisions of income tax Act, Pravesh needs, now to get little worry about his computation of total tax liability. Since, his salary income is falling in the lower bracket 10% but when he adds up his bank interest income of Rs46,541 and taxable rental income of Rs2 lakh in his salary income, his tax bracket gets upgraded from 10% to 20%, his total tax liability would, now come Rs70,797 , in which his employer and bank have already deducted TDS of Rs 25,750 and Rs4,793  respectively during the financial year. Now, you can see that Parvesh still liable to pay Rs40,254 (70,797-30,543) more as income tax. Since his income tax liability difference is more than Rs 10,000 in a year, Parvesh would need to deposit advance tax.

Case 2: Mr Akshay has annual taxable salary of Rs 50 lakh and he falls in the highest tax bracket of 30%. He has also invested Rs 20 lakh in Bank fixed deposit which fetches him interest of 9% pa every year.

For taxable salary income of Rs. 30  lakhs, the employer of Akshay deducts  monthly TDS and remits the same to the income tax department For interest income, bank deducts TDS of Rs 19,158 at the rate of 10.3% and deposit the same on behalf of Akshay to income tax department.

Tax implication of Akshay’s Case

Since Akshay’s income falls in highest tax bracket, his actual tax liability on interest received on Fixed Deposit comes out to be Rs57,474. So, Akshay is, now liable to pay Rs38,316 (57,474 – 19,158) more as income tax.

Since his income tax liability difference is more than Rs10,000 in a year, hence, Akshay would need to deposit advance tax.

Advance Tax Dates & Tax Payable

Since, advance tax is to be paid on income which has not been subject to tax deduction at source, and where the tax liability is over and above Rs. 10,000 in a financial year. As evident, in both cases, such tax on the other source of incomes of employee is required to be paid by way of advance tax in three instalments viz., the estimated amount of advance tax has to be paid even by the salaried employee by 15 September of an amount equal to 30% of the total advance tax payable. Similarly, the next instalment of advance tax is payable by 15 December which is equivalent to total 60% of the advance tax so payable and finally comes the last date of advance tax payment viz., on or before the 15th of March by which the balance advance tax as reduced by the advance tax already paid by the salaried employees has to be paid.

In both cases, if they skip to pay such advance tax within the financial year according to respective dates, they are liable to pay penal interest 1% of tax payable under section 234C of the Income Tax Act. The situation may get more worse, if they fail to pay such tax before filing of return i.e. 31^st July,( which is the most likely) 1% additional penal interest would also be charged.

How can Forgo Advance Tax Payment

In view of the provisions contained in the Income-tax Act, 1961, the salaried employees can prepare their own computation statement of their expected incomes from all sources during the financial year and disclose all details of other incomes to their employer and may make request the employer to deduct tax at source on their other incomes also. In this way, the salaried employee can stay away with hassles connected with payment of advance tax and payment of income tax of their own. Thus if you have got other income on which tax payable is below  Rs10,000 then, you need not worry at all about the hassles, problem, tensions and procedures connected with advance tax.

It may be noted here that the employer has no obligation to enquire from the employee the details of his other income. However, it is the personal choice of the employee that if he desires he can intimate to his employer the details of his other income under different heads of income and request the employer to deduct tax at source accordingly while making payment of the salary.

Conclusion

Always remember, a salaried individual always pays a part of his tax liability by way of TDS (tax deducted at source), deducted by his employer from his salary or by his bank on the interest income on the fixed deposit. Apart from this, he could be paying advance tax every quarter by self-assessing his tax liability. Thus, the tax payable by him at the end of the year would be equal to the amount left after deducting TDS and advance tax from the tax amount calculated above.

Finally, the salaried employee should carefully take into consideration all the aspects connected with payment of the advance tax so that once the advance tax is paid  in time there would no tensions of making payment of penal interest, which can be saved as enumerated above. Read also: Tax saving is not Tax Planning !