Surplus liquidity in banking drops 43% due to advance tax payments

Subject : Economy

Section: Fiscal policy

Concept :

Surplus liquidity in the banking system declined 42.9 per cent to Rs 1.04 lakh crore on June 18 from Rs 1.82 lakh crore on June 11 due to advance tax payments.
Liquidity in the banking system is the difference between incremental credit and deposits. The current fall in (surplus) liquidity is a case of deposits coming down because of advance tax payments.
Companies have drawn their deposits to pay advance tax.

Advance Tax

Advance tax is the amount of income tax that is paid much in advance rather than a lump-sum payment at the year-end. Also known as earn tax, advance tax is to be paid in installments as per the due dates decided by the income tax department.

Why is advance tax important?

Advance tax is the income tax paid in advance for the income earned in a particular financial year.
Usually, the tax is to be paid when the income is earned. Still, under the tax provisions of advance tax, the payer has to estimate the income for the entire year.
And based on this estimate the tax is paid at specific time intervals. Here it is important that the tax payer estimates the income and then calculates the estimated tax on it to check whether he or she needs to pay the advance tax and how much.

Who should pay advance tax?

As per section 208 of the Income Tax Act 1961, every person whose estimated tax liability for the year is more than or equal to `10,000 is liable to pay advance tax.
Those who are excluded from paying advance tax are senior citizens who are above the age of 60, not having any income from business or profession.