Underestimating Annual Income
One of the most frequent errors is an overly optimistic or outdated estimation of your total income for the financial year. Many taxpayers base their calculations on their income at the beginning of the year and fail to adjust for promotions, bonuses,
or better-than-expected business performance. The September instalment requires you to have paid a cumulative total of at least 45% of your total estimated tax liability for the year. If your income has trended higher since the first instalment in June, your tax liability has also increased. Failing to revise this estimate upwards can lead to a significant shortfall and attract interest penalties. It is crucial to reassess your projected annual income before the September deadline to ensure your payment is adequate.
Forgetting Other Income Sources
Salaried individuals often assume their employer's TDS (Tax Deducted at Source) covers their entire tax liability. This is a major oversight if you have other income streams. Advance tax is calculated on your total estimated income, which includes not just your salary but also earnings from freelance work, rent, interest on savings accounts and fixed deposits, dividends, and capital gains from shares or property. Many people forget to consolidate these amounts when calculating their liability. Even seemingly small income from interest or dividends can, when combined, push your total tax liability over the ₹10,000 threshold, making advance tax payments mandatory.
Incorrect Handling of Capital Gains
Capital gains, especially from stocks or mutual funds, are a common source of confusion. Since these gains can be unpredictable, many taxpayers are unsure how to account for them. The rule is that tax on capital gains should be included in the advance tax instalments that fall after the gain was realised. For instance, if you realised a significant capital gain in August, the tax on that gain must be factored into your September 15 payment. You are not penalised for not having paid it in the June instalment, as the income did not exist then. However, ignoring this new income in the subsequent instalments is a mistake that leads to underpayment.
Miscalculating the Cumulative Payment
The advance tax schedule is cumulative. The 45% due by September 15 is not 45% of your tax liability for the second quarter; it is the total amount that should be in the government's account by that date. For example, if your total advance tax for the year is estimated at ₹1,00,000, you should have paid at least ₹15,000 by June 15. By September 15, your total payments (June instalment + September instalment) must be at least ₹45,000. A common error is to calculate 30% for the second instalment (45% minus 15%) based on an old, lower income estimate, leading to a shortfall. Always calculate the cumulative percentage based on your latest income estimate.
Failure to Revise and Reconcile
Your income estimate is not set in stone. The tax laws allow and expect you to revise your estimated income throughout the year as circumstances change. If your income has decreased, you can pay a lower subsequent instalment. If it has increased, you must pay more to catch up. Before making the September payment, it's also wise to check your Form 26AS and Annual Information Statement (AIS) on the income tax portal. This helps you reconcile the TDS already deducted by clients or banks, ensuring you don't overpay or underpay your remaining liability. Not accounting for all TDS can lead to paying more than necessary, while ignoring income reported in your AIS can result in a notice later.
The Cost of Getting It Wrong
Underpaying your advance tax instalments is not without consequences. The Income Tax Act levies interest under two key sections. Section 234C applies to the deferment of instalments. If you have not paid at least 45% of your tax liability by September 15, you will be charged interest at 1% per month on the shortfall for a period of three months. Additionally, if your total advance tax paid during the year is less than 90% of your final assessed tax, interest under Section 234B at 1% per month will be charged from the beginning of the next financial year until you pay the full amount. These interest charges can add up, turning a small oversight into a costly error.
