Sunday, May 23, 2021

Income Tax (Advance tax, TDS, TCS and self-assessment tax)

 


        Assessing transactions in a financial year to know the accurate tax liability may seem possible only post facto. That is why income for a financial year is ‘assessed’ and tax returns are filed in an ‘assessment year’ which immediately follows the financial year, but liability to pay income tax arises simultaneously with an income. Therefore, law requires payment of tax in the financial year itself. Different modes through which this tax is recovered are explained in Chapter XVII of the Income tax act.


Advance tax

Any person whose tax liability for the year is expected to be Rs 10,000 or more is required to pay their tax within the financial year in four instalments. Section 211 specifies the due dates and the proportion of the yearly tax liability that must be paid. Accordingly, by June, 15% of the total tax liability must be paid. By September 14, 45 percent must be paid. This includes the instalment paid in June. By December 15, the liability is 75 percent which includes instalments of June and September. By March 15, the entire tax must be paid. Any shortfall or default in paying any of these instalments will add an interest burden for the taxpayer. Section 234C imposes an interest of 1 percent on the shortfall in the instalment amount for each month of delay in payment. On the total tax, there is a margin of up to 10 percent allowed. If the shortfall is more than this margin, section 234B requires the taxpayer to pay 1 percent interest for each month in the assessment year when the shortfall and delay continues. For interest calculation, part of a month is also counted as a full month.

For example, let us say the total of all advance tax instalments paid by Asha amounts to Rs.92000. But her actual tax liability is assessed as Rs. 100000. In that case, there will be no interest charged under section 234B as the difference is less than 10 percent. But interest under section 234C shall be charged for shortfall in any of the instalments. Say Asha paid an advance tax of Rs. 10000 on 15th June and Rs. 30000 on 15th September. In that case, the total tax payments by 15th September are 45000 which meets the minimum requirement. But the first instalment of tax paid on 15th June is short by Rs.5000. Thus, interest at the rate of 1 percent shall be charged on this shortfall for June, July, August, and September. Since advance tax is based on an income estimate, the tax liability must be reworked upon each due date so as to match the proportionate actual liability.

 

Tax Deducted at Source (TDS)

It is normally understood that a person receiving an income is the one who must pay income tax. Yet, TDS is responsibility of a person who pays, rather than one who receives that income. For example: When an employee receives salary, they must pay tax on that income. Instead, section 192 of the Act requires the employer to deduct tax from the salary and pay balance amount to the employee. Similarly, when a contractor is hired for a project, contract fee is paid after reducing the TDS amount as specified under section 194C. Rent paid by a tenant to a landlord is subject to the TDS provisions of section 194IB. These TDS amounts must be deposited on behalf of the payee into the government treasury within a specified time. There are over thirty sections between section 192 and section 196D, that cover various provisions on TDS for different categories of incomes. These describe the type of incomes on which tax must be deducted, who must deduct, at what rates and the income limits beyond which tax must be deducted. Upon deposit of TDS amount, it reflects as a tax credit against the payee’s permanent account number (PAN) in form 26AS (which can be viewed through the e-filing account). For the purpose of calculation of tax liability on each due date, these tax credits are as good as advance tax paid. Even though TDS is the responsibility of an income payer, it does not absolve a payee from tax liability. However, when a payer deducts but fails to pay TDS, the payee shall not be liable to that extent (as provided in section 205).

 

Tax collected at Source (TCS)

Another mode for income tax recovery is by collecting it along with sales revenue. Section 206C specifies a list of items and the rate to be applied for tax collection upon their sale. Tax collection is required only from buyers who intend to trade in those goods. For example, TCS is made on liquor purchases by a wine shop owner. But no tax is collected on a retail sale made by the wine shop. Similarly, if the liquor is purchased for use as raw material in making medicines, there is no TCS since the liquor was not meant for trading.

Apart from collecting tax on sale of goods, section 206C also requires lessors of toll plaza, parking lots and quarry to collect TCS from their lessees at a specified percentage of the lease value. An individual buyer is subject to TCS under the section when they buy any motor vehicle that exceeds Rs.10 lakhs. Even though the nature of tax collection is akin to duties and indirect taxes, TCS is essentially an Income tax which the buyer or lessee can claim in their income tax return.

 

Self-assessment tax

Finally post the financial year when transactions are assessed, there is clarity on the precise tax liability. This is compared with total tax credits reflecting in form 26AS by way of TDS, TCS or Advance taxes. If there is a shortfall in payments, the difference must be paid as self-assessment tax along with interest if any while filing the Income tax return. In case of an excess payment, the taxpayer can claim a refund in their income tax return.

 

Source : www.cnbctv18.com

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