Income tax hack: Do this by 31 March to avoid interest on advance tax shortfall

Imagine realizing in March that you owe additional taxes—plus interest—because you missed your advance tax payments. For many salaried individuals earning extra income from fixed deposits, stocks, or rental properties, this is a costly oversight. 

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While employers deduct tax at source (TDS) on salaries, they don’t account for other sources of income unless explicitly informed. The good news? A simple declaration to your employer before the financial year ends can help you avoid unnecessary penalties under Section 234C of the Income Tax Act. Here’s how it works and why timing matters.

Who needs to pay advance tax?

Under Indian tax laws, if your total tax liability exceeds ₹10,000 in a financial year, you must pay advance tax in installments—15% by June 15, 45% by September 15, 75% by December 15, and 90% by March 15. Any shortfall attracts interest under Section 234C.

For salaried employees, this usually isn’t a concern since their employer deducts tax at source each month. Senior citizens without business income are also exempt. However, many salaried individuals earn additional income from sources like bank interest, rental income, dividends, or even stock market trading. 

If the TDS deducted by the employer doesn’t cover the tax liability on this extra income, the employee must pay advance tax—or risk incurring interest.

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“You can report any additional income you have earned to your employer by March. Your employer will deduct TDS on this income also and this can save you from payment of interest under Section 234C on unpaid advance tax,” said Prakash Hegde, a Bengaluru-based chartered accountant. 

“This is more efficient than you yourself paying advance tax in March which you have forgotten to pay earlier as per the required due dates. Such late payment does attract interest under Section 234C,” Hegde added.

While employers are legally required to consider additional income if declared, practical constraints exist. Many companies close payroll processing by mid-March, while some set cut-off dates as early as January or February, says Chirag Wadhwa, CFO at Mobavenue Media and a Mumbai-based Chartered Accountant. 

How to declare additional income

Employers deduct TDS under Section 192B of the Income Tax Act, 1961. To adjust for additional income, you need to submit a simple declaration under Section 26B of the Income Tax Rules, 1962. There’s no prescribed format—just a document listing your additional income and any TDS already deducted (e.g., by banks or companies paying dividends) should suffice.

Once submitted, your employer will deduct the necessary TDS from your March salary, helping you avoid interest penalties.

Let’s say you earn ₹4 lakh in interest from bank fixed deposits during the year. The bank deducts ₹40,000 as TDS (10%), but since you fall under the 30% tax bracket, you still owe ₹80,000 in additional tax. If you forget to pay this as advance tax, you become liable for interest under Section 234C.

However, if you declare this ₹4 lakh income to your employer in March, they will deduct the additional ₹80,000 from your salary as TDS. This prevents the 1% monthly interest charge on unpaid tax. Since the interest is calculated separately for each missed instalment, in this case, it would amount to ₹4,032—an avoidable penalty simply by making a timely declaration.

While this approach is convenient, it can lead to a significant TDS deduction in March, potentially straining your cash flow. Additionally, it only works if your March salary is sufficient to cover the additional tax liability. If the tax owed exceeds your salary, you’ll still need to pay advance tax directly by 31 March.

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By planning ahead and informing your employer in time, you can avoid unnecessary interest costs and manage your tax liabilities more efficiently.