Understanding Advance Tax & TDS (Tax Deducted at Source)
Advance Tax and TDS are two pillars of India’s tax collection mechanism under the Income Tax Act, 1961. They ensure that taxes are collected throughout the financial year rather than waiting until the end of assessment. These systems uphold the principle of “Pay as You Earn”, which is essential for steady government revenue, prevention of tax evasion, and minimizing the financial burden on taxpayers at the end of the year. For law students, understanding these mechanisms is crucial because they often appear in exams, practical assessments, and professional taxation work.
Advance Tax and TDS operate differently but complement each other. Advance Tax is paid directly by the assessee in installments, while TDS is collected at the source of income by the person making the payment. Both systems are backed by statutory provisions, judicial interpretations, and strict compliance mechanisms.
Advance Tax: Meaning and Purpose
Advance Tax refers to the payment of income tax in installments during the financial year, based on estimated income. Section 208 mandates payment of advance tax when the tax liability exceeds ₹10,000 in a financial year. This ensures a uniform flow of revenue to the government and helps assessees spread the tax burden across the year.
Advance Tax embodies the philosophy that taxes should be paid as income is earned. The Supreme Court in CIT v. Instalment Supply Ltd. held that the advance tax system reflects the legislature’s intent to ensure prompt and steady revenue collection and reduce last-minute disputes over taxable income.
Tip: “Calculate your estimated income quarterly to avoid interest under Sections 234B & 234C.”
Who Is Liable to Pay Advance Tax?
Advance tax applies to all categories of taxpayers—individuals, HUFs, firms, LLPs, companies, and professionals—provided their tax liability crosses the ₹10,000 threshold. Section 207 provides exceptions for senior citizens (60+ years) who do not earn income from business or profession. For companies, advance tax is almost always mandatory due to regular commercial activity.
Courts have clarified liability under certain circumstances. In Tata Chemicals Ltd. v. CIT, the Supreme Court held that even in cases of TDS mismatch or delays, tax authorities must treat advance tax provisions with fairness as long as the intent to comply is evident.
Calculation and Installments of Advance Tax
Advance tax is calculated on estimated income for the financial year after adjusting:
- Deductions under Chapter VI-A
- TDS already deducted
- Relief under Sections 89, 90, 90A, 91
Installments under Section 211 apply differently for individuals and companies.
Advance Tax Installment Structure
For Non-Corporate Taxpayers
- 15% of tax by 15th June
- 45% by 15th September
- 75% by 15th December
- 100% by 15th March
For Corporate Assessees
The same schedule applies, but companies must strictly adhere due to high-volume transactions.
In Soma Developers v. CIT, the Court upheld that failure to pay correct advance tax due to wrong estimation still attracts interest unless the taxpayer proves a reasonable cause.
Tip: “Use previous year’s income as a benchmark to prevent underestimation of income.”
Interest for Default or Shortfall
Sections 234B and 234C impose interest for non-payment or short payment of advance tax.
- Section 234B applies when an assessee fails to pay 90% of assessed tax.
- Section 234C applies when installments are delayed or insufficient.
The Supreme Court in CIT v. Anjum M.H. Ghaswala held that levy of interest is mandatory and not discretionary. Law students must remember that these provisions operate automatically.
TDS (Tax Deducted at Source): Meaning and Importance
TDS is a system where tax is deducted at the time of payment by the payer and deposited with the government. Sections 192 to 206 lay out detailed provisions for TDS. TDS is designed to prevent revenue leakage and ensure early collection of tax. It also distributes taxpayers’ liability across the year.
The Supreme Court in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT held that once the recipient has paid the tax, the department cannot recover it again from the deductor, though interest may still apply. This decision underscores that TDS is a mechanism, not a separate tax.
Tip: “Check Form 26AS and AIS periodically to confirm your TDS credits.”
Persons Liable to Deduct TDS
TDS must be deducted by persons making specified payments such as:
- Employers
- Banks
- Companies
- Firms
- Individuals (if covered under Section 44AB audit)
TDS provisions apply to payments such as salary, interest, rent, commission, contractual fees, professional fees, dividend, winnings, and more. Law students must understand that liability to deduct arises at the time of credit or payment, whichever is earlier, unless the section specifically specifies otherwise.
TDS Rates and Relevant Provisions
Each TDS section prescribes a specific rate. Some important provisions include:
- Section 192 – TDS on salary
- Section 194A – Interest other than securities
- Section 194C – Contractors and subcontractors
- Section 194J – Professional or technical fees
- Section 194-IA – Purchase of immovable property
- Section 194-O – E-commerce transactions
Judicial reading in CIT v. Eli Lilly & Co. highlighted that employers must consider all components of salary—including perquisites—while calculating TDS under Section 192.
Consequences of Non-Deduction or Late Deduction/Deposit
Failure to deduct or deposit TDS attracts:
- Interest under Section 201(1A)
- Penalty under Section 271C
- Prosecution under Section 276B in extreme cases
The Delhi High Court in Engineers India Ltd. v. CIT observed that TDS compliance is a statutory obligation, and unintentional delay may still invite liability unless reasonable cause is shown under Section 273B.
Tip: “Deposit TDS within the 7th of next month to avoid interest and penalties.”
TDS Return Filing
Quarterly TDS returns (Forms 24Q, 26Q, 27Q) must be filed to report deductions. Section 234E imposes a late filing fee of ₹200 per day until the return is filed. Proper filings ensure that deductees receive TDS credit in Form 26AS and avoid mismatches.
Difference Between Advance Tax and TDS
While both ensure early tax collection, they differ fundamentally:
- Advance Tax is self-assessed; TDS is collected at source.
- Advance Tax applies on income after TDS; TDS applies at the moment of payment.
- Advance tax is paid by the assessee; TDS is paid by the deductor.
Courts have harmonized these mechanisms, such as in Brig. B.L. Puri v. CIT, clarifying that both must be considered jointly when computing liability.
Conclusion
Advance Tax and TDS together ensure continuous and efficient tax collection in India. Their statutory framework, combined with judicial scrutiny, provides clarity and accountability in the taxation system. For law students, mastering these provisions is crucial, as they form the backbone of practical tax practice and exam preparation. Understanding the interplay between TDS credits, advance tax installments, and final tax computation ensures a complete and accurate grasp of tax liability under the Income Tax Act, 1961.
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