What Is Advance Tax & How To Calculate It

What is Advance Tax?

Any individual or business in India is required to pay taxes within that financial year. Tax can be paid in two ways. The first option is filing returns and paying taxes at the end of the financial year. The second option is to pay tax in instalments throughout the year. This method is also called an advance tax payment. 

If tax liability exceeds Rs.10000 in a fiscal year, one is liable to pay advance tax and if your income increases or decreases, the advance tax instalments can be adjusted accordingly. It also aids the government as they have a stream of income throughout the year.

Furthermore, taxpayers can use tax challan. These are available in bank branches approved by the Income Tax Department that are used to pay advance taxes. You may also file an ITR digitally, on the official websites of the National Securities Depository Limited and the Income Tax Department. 

Who Needs to Pay Advance Tax?

Salaried Individuals, Freelancers And Businesses: Advance tax payment is paid if the tax liability exceeds Rs.10,000.

If you are a salaried individual, the employer deducts TDS from the salary each month and submits this information to the income tax department. Thus, you don’t need to pay advance tax.

However, in the case of other income sources apart from your salary, you have to pay advance tax on a hefty tax liability. Other income sources include earnings from fixed deposits, capital gain on sale of shares, lottery winnings and property rentals.

Presumptive Income for Businesses: Businesses who choose the presumptive tax regime under Section 44AD should pay the entire advance tax liability in a single payment on or before 15th March. Nevertheless, they can also settle tax obligations by 31st March.

Presumptive Income for Professionals: Independent professionals like architects, doctors, lawyers, consultants, etc., fall under the presumptive tax regime under Section 44ADA. They must make a single full payment for their advance tax liability on or before 15 March. They also have the option to pay the entire amount by 31st March.

Senior Citizens: If an individual is over 60 years and does not own a business, they are exempt from paying advance tax. However, if they are over 60 and own a business, they have to pay advance tax.

Also Read: Smart Tax Planning for Young Earners: Navigating Finances In Your Twenties

Why is Advance Tax Important?

Paying advance tax is important for the following reasons:

Reduces Penalties: When an individual delays in paying taxes, penalties are levied. Thus, paying an advance tax minimises any last-minute delays.

Minimises Stress: It helps mitigate stress that a taxpayer may undergo while making tax payments at the end of the fiscal year.

Fiscal Discipline: Individuals and businesses can keep better track of their income and expenses. They are in check with their earnings throughout the year instead of the end of the financial year.

Increases Government Funds: It helps in raising government funds as the government receives interest on the tax collected.

Avoid Shortage of Funds: If a taxpayer waits till the last date to pay taxes, they may fall short of funds. This again leads to penalties for late payments

How to Calculate Advance Tax?

The steps to calculate advance tax are as follows:

• Estimate the total income earned by you other than your salary
• Deduct all expenses from your income, including medical insurance premiums, phone bills, travel expenses, etc.
• Add other income that you received apart from your salary. This includes interest from FDs, house rent, lottery winnings, etc.
• Compute tax on this income as per the regime selected
• Reduce the amount of tax paid by way of TDS/TCS

If the amount of tax calculated is more than 10,000, then you are liable to pay advance tax.

Here is An Example of Advance Tax Calculation of a Salaried Employee:

Ms Z, a salaried individual, earns a total salary income of Rs. 8,50,000 during the financial year 2023-24. She earns income from a savings account (interest). Ms Z estimates Rs. 18,000 towards TDS. She has earned Rs. 25,000 in interest from fixed deposits for the financial year. She deposits Rs. 75,000 towards her PPF account, Rs. 20,000 towards her LIC premium, and Rs. 12,000 towards her medical insurance premium.

Here is the breakdown of advance tax calculation, as per income, deductions, and estimated TDS for the FY 2024-2025:

Due Dates for Advance Tax Payments

Both individual and corporate taxpayers for FY 2024-2025

For taxpayers who have opted for Presumptive Taxation Scheme under sections 44AD & 44ADA – Business and Profession Income

Which forms are Required in Advance Tax?

Challan No. ITNS 280 is a form that has to be filled in on the given due dates. Prerequisites of Challan No. ITNS 280 are as below:

Permanent Account Number (PAN) Details: It is important to give correct PAN details. If you fail to do so, your tax will be deposited in someone’s name.

Assessment Year: Since your tax is being paid in advance for the upcoming financial year, make sure you select the appropriate assessment years for which you will make the payment.

Selecting the Payment Type: The taxpayer needs to select the payment type in the form. If the tax is paid for the same financial year based on estimated income, it will be advance tax. On the other hand, if the tax is paid after the completion of the financial year, it is considered a self-assessment tax.

Once the payment is made, a Challan Identification Number (CIN) will be issued. The taxpayer needs to keep a note of this number and use it while filing the Income Tax Return (ITR). Additionally, you need to verify whether the income tax department has received the online payment.

Also Read: What is Form 16? Differences Between Form 16, Form 16A, 16B

Benefits of Paying Advance Tax

Paying advance personal loan tax benefits both the taxpayers and the government. 

Reduces Tax Evasion: Advance tax requires that a taxpayer estimate their income and pay taxes as per that. This discourages tax evasion tactics and ensures tax compliance.

Encourages Fiscal Discipline: Paying advance tax requires the taxpayer to keep track of their income and expenses. This encourages efficiency in filing taxes, thereby reducing penalties.

Relieves Taxpayer: Instead of paying tax at the end of the fiscal year, a taxpayer has the option to pay advance tax in instalments. Thus, the taxpayer doesn’t have to pay the entire tax amount at once, thereby reducing penalties and added stress.

Better Cash Flow: Advance tax payments aid in better cash flow since payments are made throughout the year. This helps to maintain liquidity and fulfil other financial obligations.

Penalties for Non-Payment of Advance Tax

Non-payment or delay will attract penalties for advance tax.

1. Non-Payment of Advance Tax will Attract Interest Under 234B: As per Section 234B, you must pay at least 90% of the total taxes as advance tax or TDS/TCS by 31st March. Failure to make advance tax payments will result in an interest of 1% on the unpaid amount.

2. Delay in Payment of Advance Tax will Attract Interest Under 234C: If there is a delay in payment of advance tax, under section 234C, you are liable to pay interest charges as below:

• If the advance tax paid by June 15th is less than 15% of the total tax liability, a monthly interest rate of 1% applies for three months. This is calculated based on 15% of the total tax liability minus any tax paid before June 15th.
• If the advance tax paid by September 15th is less than 45% of the total tax liability, the same 1% monthly interest rate applies for three months. This calculation is based on 45% of the total tax liability minus any tax paid before September 15th.
• If the advance tax paid by December 15th is less than 75% of the total tax liability, the interest rate remains 1% per month for three months. This is determined by calculating 75% of the total tax liability minus any tax paid before December 15th.
• Lastly, if the advance tax paid by March 15th is less than 100% of the total tax liability, a 1% monthly interest rate applies for one month. This calculation is based on 100% of the total tax liability minus any tax paid before March 15th.
  

Also Read: Penalty For Late Filing of ITR: Everything You Need to Know

How to Pay Advance Tax Online

Follow this guide for advance tax payment online:

Step 1: Go to the e-filing portal of the I.T. Department of India.

Step 2: Click on ‘e-pay Tax’ under ‘Quick Links’.

Step 3: Enter ‘PAN’ and ‘Mobile Number’ and proceed to click on ‘Continue’.

Step 4: Fill out the received  ‘OTP’ and next click on ‘Proceed’.

Step 5: Choose the First Tab that says ‘Income Tax’ Option and then click on ‘Continue’.

Step 6: Choose the ‘Assessment Year’ and ‘Type of Payment’ as ‘Advance Tax (100)’. Press ‘Continue’.

Step 7: Fill out all the details about tax.

Step 8: Select the relevant mode of payment and the bank and proceed to click on ‘Continue’.

Step 9: Get a preview of the challan and then press the ‘Pay Now’ button.

Step 10: Once the payment is completed, an acknowledgement will appear on the following screen. The BSR code and challan serial number will be displayed on the challan’s right side. Ensure to get a copy of this receipt since the stated BSR code and challan number will be required in tax return.

Those who are not comfortable with the online advance tax payment method may use the offline payment facility by submitting the challan at the I.T. Department authorized bank branches. 

Conclusion

Understanding advance tax payment is crucial for any taxpayer. It ensures tax regulation compliance and fiscal discipline in individuals and businesses alike. Moreover, paying advance tax in instalments aids in cash flow and minimises penalties on late payments. Advance tax aids the government in receiving a steady flow of funds throughout the year. This helps them give insights on budgeting and planning public expenditures like infrastructure projects, social welfare programs that benefit the society at large.