What is Advance Tax? A Complete Guide for Indian Taxpayers
- ashlinj52
- Dec 31, 2024
- 5 min read
Advance Tax is a system in India that allows taxpayers to pay their income tax in installments throughout the financial year, rather than a lump sum payment at the end of the year. This tax scheme ensures that the government receives a steady stream of income to meet its expenditure needs, and it also helps individuals avoid a huge tax burden at the time of filing their income tax returns.
In this blog, we will explain what advance tax is, how it works, who is liable to pay it, the due dates for payment, and how you can calculate and pay it efficiently.
What Is Advance Tax?
Advance Tax, often called “Pay-as-you-earn” tax, is the tax that a person is required to pay on their income, before the end of the financial year. This means that tax is paid in advance in installments based on the projected annual income for that year.
The concept of advance tax came into being to reduce the taxpayer's burden of paying a large sum of tax at the end of the financial year. It helps in the regular inflow of revenue for the government.
Who Needs to Pay Advance Tax?
In India, any taxpayer whose tax liability in a financial year exceeds ₹10,000 is liable to pay advance tax. This includes individuals, Hindu Undivided Families (HUFs), companies, and other businesses.
Here are the categories of taxpayers who must pay advance tax:
Individuals: Those whose tax liability exceeds ₹10,000 and who earn income from sources like salary, business, property, capital gains, etc.
HUFs: Hindu Undivided Families that have an income above the ₹10,000 threshold.
Businesses: Companies and business owners who expect their total tax liability to exceed ₹10,000 in the financial year.
Freelancers and Professionals: People working as freelancers, consultants, or in any other professional capacity who have a tax liability of more than ₹10,000.
When Should Advance Tax Be Paid?
Advance tax payments are made in four installments during the financial year, based on the estimated income of the taxpayer. The due dates for advance tax payments are as follows:
Installment Due Date | Tax Amount to be Paid |
On or before 15th June | 15% of the estimated tax liability |
On or before 15th September | 45% of the estimated tax liability |
On or before 15th December | 75% of the estimated tax liability |
On or before 15th March | 100% of the estimated tax liability |
Note that taxpayers are required to pay a percentage of their total tax liability by the due date. For example, by June 15th, 15% of the total tax liability is to be paid, and so on, until the final installment in March, which covers the remaining balance.
How to Calculate Advance Tax?
To calculate advance tax, you need to estimate your total income for the financial year, including:
Salary income
Income from business or profession
Income from house property
Income from capital gains
Other sources of income (interest, dividends, etc.)
Advance Tax Calculation Process
Estimate your total income for the year.
Subtract any exemptions you are eligible for (e.g., HRA, 80C deductions).
Calculate your taxable income.
Apply the appropriate tax slab rates to calculate the tax payable.
Deduct any TDS (Tax Deducted at Source) that has already been paid on your behalf, such as from your salary, bank interest, etc.
The remaining amount is your advance tax liability, which is paid in installments as mentioned above.
For example, let’s assume you are a salaried employee and have additional income from capital gains, resulting in the following estimates for the financial year:
Total income (salary + capital gains): ₹12,00,000
Eligible deductions (e.g., 80C): ₹1,50,000
Taxable income: ₹10,50,000
Tax payable: ₹1,25,000 (assuming applicable tax slabs and rates)
Based on these calculations, you would need to pay advance tax of ₹1,25,000 in four installments.
How to Pay Advance Tax?
Advance tax can be paid through the Income Tax Department’s e-filing portal or using challan 280 through banks.
Steps to Pay Advance Tax Online:
Log in to your e-filing account on the Income Tax Department’s website.
Go to the 'e-Pay Tax' option under the 'e-File' menu.
Select 'Advance Tax' under the payment category.
Enter the required details such as PAN, assessment year, and the amount of advance tax to be paid.
Make the payment via Net Banking, Credit/Debit Card, or through NEFT/RTGS.
You will receive an acknowledgment and Challan receipt, which you should keep for future reference.
Consequences of Not Paying Advance Tax
If you do not pay advance tax or miss an installment, you may be liable to pay interest under Sections 234B and 234C of the Income Tax Act. The following consequences apply:
Interest Under Section 234B: If you have underpaid or not paid advance tax, the income tax department may impose an interest rate of 1% per month on the outstanding tax amount from the due date of payment.
Interest Under Section 234C: If you don’t pay the correct installment by the due date, an interest of 1% per month will be charged on the shortfall in each installment. The penalty increases based on how late the payment is.
Are There Any Exemptions from Paying Advance Tax?
In some cases, individuals may be exempt from paying advance tax. These include:
Senior Citizens (above 60 years): If you’re a senior citizen and don’t have income from business or profession, you’re exempt from paying advance tax.
Individuals whose tax liability is less than ₹10,000: If your estimated tax liability for the financial year is below ₹10,000, you do not need to pay advance tax.
Common Mistakes to Avoid
Not Estimating Income Accurately: If you underestimate your income or overestimate deductions, you may end up paying less advance tax than required, leading to penalties and interest.
Missing Installments: If you miss any of the deadlines, you will be penalized with interest under Sections 234B and 234C.
Not Adjusting TDS: Ensure you account for all TDS already deducted (from salary, interest, etc.) when calculating your advance tax liability.
Conclusion
Advance tax is an essential part of tax planning for taxpayers who expect their income to exceed ₹10,000 in a year. By making timely payments in installments, you can avoid a hefty lump-sum tax bill and reduce the risk of penalties or interest for non-compliance. The process is simple, and paying your taxes on time ensures a hassle-free filing experience at the end of the financial year.
Remember, advance tax is only applicable if your tax liability exceeds ₹10,000, and you need to follow the due dates to avoid interest and penalties. Always consult with a tax professional if you are unsure about your advance tax payments or calculation.
By understanding what advance tax is and how it works, you can ensure timely compliance and avoid penalties, making tax season much easier.
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