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Is it better to pay TDS or advance tax?

Salaried individuals having other sources of income viz., Interest Income, Income from Let-Out Property, Capital Gains etc have additional taxes to be paid in addition to the tax payable on their salary.

In such cases, individuals generally separately pay their additional tax liability in the form of Advance Tax (if paid within the Financial Year) or Self Assessment Tax (if paid after the end of the Financial Year).

There is another simple & efficient mode of payment that not many individuals use i.e. TDS (Tax Deducted at Source) route through the employer. In this scenario, the individual needs to provide the additional income to her/his employer who would then add the income, work out the additional tax and include it in the salary TDS recovery.

Individuals generally hesitate using this option for various reasons ranging from the fact that the individual was not aware of such possibility to something like they would not wish their employers to know of their other income details.

Though this is an individual's choice, let us at least look at the advantage of including the other income along with the salary income for TDS calculation.

Advance Tax (Balance Tax) has to be ideally estimated at the beginning of the year and pay the proportionate tax on the stipulated dates. In case these proportionate payments are not done then penal interest is applicable on the amount not paid on time.

The balance tax is worked out after reducing the TDS made during the Financial Year, which means that in case you do not pay advance tax through the year but get the tax paid through TDS towards the end of year, you will effectively avoid paying any penal interest. This works to the advantage of the individual who can leverage on the timing difference in the cash outflow.

An example to illustrate this is stated below using the case of Sriram & Jairam:

  Sriram Jairam
Salary 24,00,000 24,00,000
Bank Interest 200,000 200,000
Bank Interest declared to employer Yes No
Total Tax Liability 628,300 628,300
TDS – Employer 628,300 566,500
Balance (Advance) Tax Payable Nil 61,800
Advance Tax Paid on March 15 Nil 61,800
Penal Interest Payable Nil 1,665

Through this illustration it can be seen that though all numbers are the same but just by getting the Interest income included along-with the Salary TDS calculation, Sriram has saved about Rs. 2,000 on account of penal interest, whereas Jairam had to make his own tax payment arrangements and even had to shell out the additional penal interest.

All in all it works out better if an individual gets her / his other income added along-with her / his salary income for the purpose of TDS calculation.

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