A reader asks, “Can you please write an article on when an investor should capital gains tax after redeeming from mutual funds or shares? That is, which time of the financial year. Should I pay the tax immediately or can I pay in March of each financial year?”
The short answer to this question is if you are a salaried person and most of your income tax liability is from the salary for which TDS is duly deducted by your employer it is good practice to pay the advance tax associated with the capital gain immediately after the redemption amount hits your bank account.
If you are a business person or a professional used to paying advance tax four times a financial year (or more!) then you can wait until the next advance tax deadline (not any longer) to pay the necessary capital gain tax. Let us discuss why this is so.
Any taxpayer with a tax liability of more than Rs. 10,000 per FY should pay advance tax. Only senior citizens who do not have an income from a business or profession are exempt from this. For salaried taxpayers, the employer takes care of advance tax payments.
However, if they have income from other sources or capital gains that are significant, then they must ensure advance tax payment norms are met.
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- On or before 15th June 15% of total tax liability.
- On or before 15th September 45% of total tax liability.*
- On or before 15th December 75% of total tax liability*.
- On or before 15th March 100% of total tax liability*.
* excluding amt already paid.
Suppose there is a significant additional income via capital gains or other sources between June 16th to Sept 15th of a financial year. Then the total tax liability (tax from these sources + salary) should be computed. Out of this amount, 45% should be paid as advance tax after deducting the amount deducted so far.
If we delay paying the additional tax due to CG and other sources, then we may need to pay interest at the rate of 1% per month. This penalty will kick in if:
- Less than 12% of total tax liability is paid on or before 15th June (instead of 15%).
- Less than 36% of total tax liability is paid on or before 15th September (instead of 45%).
- Less than 75% of total tax liability is paid on or before 15th December (75% is expected!)
- Less than 100% of total tax liability is paid on or before 15th March (100% is expected!)
If the CG or income from other sources is significant, it is quite easy to fall short of the expected advance tax payment limits. This is why we recommend salaried taxpayers immediately pay the necessary advance tax due immediately after the redemption amount hits your bank account. Of course, one could wait until the next adv. tax deadline but salaried taxpayers are not used to this and may forget unlike those who regularly pay advance tax.