Explained: What are advance tax, TDS, TCS and self-assessment tax? | Taxation for CA Intermediate PDF Download

Introduction

Determining the precise tax liability for a financial year may appear feasible only after the fact. This is why income for a financial year undergoes assessment, and tax returns are submitted in the subsequent "assessment year" following the financial year.

However, the obligation to pay income tax arises concurrently with earning income. Hence, the law necessitates tax payment within the financial year. The various methods of tax recovery are detailed in Chapter XVII of the Income Tax Act.

Advance tax

• Individuals with an anticipated tax liability of Rs 10,000 or more for the year are obligated to pay their taxes in four installments within the financial year. Section 211 outlines the due dates and the proportion of the annual tax liability to be paid. Specifically, 15% of the total tax liability must be paid by June, 45% by September (including the June installment), 75% by December (including June and September installments), and the entire tax by March.
• Failure to meet any of these installment payments will result in an interest burden for the taxpayer. Section 234C imposes a 1% interest on the shortfall in installment amount for each month of delay in payment. There is a margin of up to 10% allowed on the total tax. If the shortfall exceeds this margin, Section 234B requires the taxpayer to pay 1% interest for each month in the assessment year where the shortfall and delay persist.
• For instance, if Asha's total advance tax installments amount to Rs. 92,000 but her actual tax liability is Rs. 100,000, no interest will be charged under Section 234B as the difference is less than 10%. However, interest under Section 234C will be charged for any shortfall in the installments.
• Consider if Asha paid Rs. 10,000 on 15th June and Rs. 30,000 on 15th September. The total tax payments by 15th September amount to Rs. 45,000, meeting the minimum requirement. However, the first installment paid on 15th June is short by Rs. 5,000. Therefore, interest at the rate of 1% will 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 recalculated on each due date to align with the actual liability proportionately.

Tax Deducted at Source (TDS)

• Typically, it's assumed that the person earning income is responsible for paying income tax. However, the responsibility for Tax Deducted at Source (TDS) lies with the payer rather than the recipient of the income. For instance, when an employee receives a salary, the tax obligation falls on them. Yet, Section 192 of the Act mandates the employer to deduct tax from the salary and then pay the balance amount to the employee.
• Similarly, when hiring a contractor for a project, the contract fee is paid after deducting the TDS amount as per Section 194C. Rent paid by a tenant to a landlord is subject to TDS provisions under Section 194IB. These TDS amounts must be deposited on behalf of the recipient into the government treasury within the specified timeframe.
• There are more than thirty sections from Section 192 to Section 196D that detail various TDS provisions for different income categories. These sections specify the types of income subject to tax deduction, who must deduct the tax, applicable rates, and income thresholds beyond which tax deduction is mandatory.
• Upon TDS deposit, it appears as a tax credit against the recipient's Permanent Account Number (PAN) in Form 26AS, accessible through the e-filing account. These tax credits are treated akin to advance tax paid for calculating tax liability on each due date.
• Although TDS is the responsibility of the income payer, it doesn't exempt the recipient from tax liability. However, if a payer deducts TDS but fails to remit it, the recipient is not liable to that extent, as per Section 205.

Tax collected at Source (TCS)

• Another method of income tax recovery involves collecting it alongside sales revenue. Section 206C delineates a list of items and the applicable tax collection rates upon their sale. Tax collection is mandated solely from buyers intending to trade in these goods. For instance, Tax Collection at Source (TCS) is levied on liquor purchases by a wine shop owner, but no tax is collected on retail sales by the shop. Likewise, if the liquor is procured for use as raw material in medicine production, TCS is not applicable as it wasn't intended for trading.
• In addition to goods sales, Section 206C also mandates lessors of toll plazas, parking lots, and quarries to collect TCS from lessees based on a specified percentage of the lease value.
• Individual buyers are subject to TCS under this section when purchasing any motor vehicle exceeding Rs. 10 lakhs.
• While TCS resembles duties and indirect taxes in its collection nature, it's fundamentally an income tax that buyers or lessees can claim in their income tax returns.

Self-assessment tax

• After the financial year ends and transactions are assessed, the exact tax liability becomes clear. This is then compared with the total tax credits shown in Form 26AS, including TDS, TCS, or advance taxes. If there's a deficit in payments, the shortfall must be settled as self-assessment tax along with any applicable interest when filing the Income Tax return. Conversely, if there's an overpayment, the taxpayer can request a refund when filing their Income Tax return.