Why should advance tax payments be made?
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Advance tax payments help taxpayers avoid a lump sum tax burden at the end of the financial year and prevent interest penalties for delayed payments.
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Advance Tax Payment
By Bajaj Broking Team
July 25, 2024
6 mins read
Taxes
Advance tax refers to the income tax that individuals and businesses are required to pay in installments throughout the financial year, rather than making a lump sum payment at the end of the year. This system ensures a continuous flow of revenue for the government and helps taxpayers manage their tax liabilities more effectively.
What is Advance Tax?
Advance tax, often termed as the "pay-as-you-earn" tax, is the income tax paid in advance during the financial year in which the income is earned. Instead of waiting until the end of the fiscal year to settle tax dues, taxpayers make periodic payments based on their estimated income. This approach aligns tax payments with income generation, facilitating smoother financial planning for both the government and taxpayers.
What is Advance Tax Payment?
Advance tax payment involves the process of remitting portions of one's anticipated tax liability at specified intervals within the financial year. These payments are made based on estimated income, and any discrepancies between estimated and actual income can be adjusted in subsequent installments or during the final tax filing.
Who Should Pay Advance Tax?
Advance tax is applicable to various categories of taxpayers:
- Salaried Individuals: If the tax liability exceeds ₹10,000 after accounting for Tax Deducted at Source (TDS), advance tax must be paid.
- Freelancers and Professionals: Individuals with income from professions such as consulting, legal services, or freelance work are required to pay advance tax if their tax liability surpasses ₹10,000.
- Businesses: Both corporate and non-corporate entities must comply with advance tax provisions if their tax liability exceeds the specified threshold.
- Non-Resident Indians (NRIs): NRIs with income accruing in India that results in a tax liability exceeding ₹10,000 are also obligated to pay advance tax.
Note: Senior citizens aged 60 years or above, who do not have income from business or profession, are exempt from paying advance tax.
Advance Tax Payment Due Dates & Amount
The due dates and the corresponding percentages of advance tax to be paid are as follows:
For Individual and Corporate Taxpayers:
Installment | Due Date | Percentage of Advance Tax Payable |
1st | 15th June | 15% |
2nd | 15th September | 45% |
3rd | 15th December | 75% |
4th | 15th March | 100% |
For Taxpayers under Presumptive Taxation Scheme (Sections 44AD and 44ADA):
Installment | Due Date | Percentage of Advance Tax Payable |
1st | 15th March | 100% |
Note: Taxpayers under the presumptive taxation scheme can also pay their entire advance tax liability by 31st March.
Advance Tax Late Payment Date
If advance tax is not paid as per the prescribed schedule, interest is levied under Sections 234B and 234C of the Income Tax Act. The interest rates and conditions are detailed in the section "What is the Interest on Late Payment of Advance Tax?".
How is Advance Tax Payment Calculated?
To calculate advance tax:
- Estimate Total Income: Compute the total income expected during the financial year, including salary, business income, capital gains, interest, and other sources.
- Deduct Allowable Expenses and Deductions: Subtract expenses and deductions permissible under the Income Tax Act, such as those under Sections 80C, 80D, etc.
- Compute Tax Liability: Apply the applicable income tax rates to the net taxable income to determine the total tax liability.
- Subtract TDS: Deduct the amount of tax expected to be withheld or already withheld (TDS) by employers or others.
- Determine Advance Tax Liability: If the resulting tax liability exceeds ₹10,000, calculate the advance tax payable as per the due dates and percentages mentioned above.
Example for Advance Tax Calculation
Scenario: Mr. Sharma, a freelancer, estimates his taxable income for the financial year to be ₹12,00,000. He anticipates deductions under Section 80C amounting to ₹1,50,000.
Calculation:
- Gross Taxable Income: ₹12,00,000
- Less: Deductions under Section 80C: ₹1,50,000
- Net Taxable Income: ₹10,50,000
- Tax Liability Calculation:
Up to ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹10,00,000: 20% of ₹5,00,000 = ₹1,00,000
Above ₹10,00,000: 30% of ₹50,000 = ₹15,000
Total Tax: ₹12,500 + ₹1,00,000 + ₹15,000 = ₹1,27,500
- Add: Health and Education Cess (4% of ₹1,27,500): ₹5,100
- Total Tax Liability: ₹1,32,600
- Advance Tax Installments:
15th June (15%): ₹19,890
15th September (45%): ₹59,670
15th December (75%): ₹99,450
15th March (100%): ₹1,32,600
Note: Any TDS deducted can be adjusted against these amounts.
How to Pay Advance Tax Online?
To pay advance tax online:
- Visit the Official Portal: Go to the Income Tax Department's e-filing portal.
- Navigate to e-Payment: Select the "e-Pay Tax" option.
- Choose Challan 280: This challan is used for advance tax payments.
- Fill in the Details: Enter PAN, assessment year, address, and other required information.
- Select Payment Type: Choose "Advance Tax" as the type of payment.
- Choose Bank and Payment Mode: Select your bank and preferred mode of payment (net banking or debit card).
- Complete the Payment: After verifying the details, proceed to pay. A challan counterfoil with the payment details will be generated upon successful payment.
Advance Tax Payment: Exemptions
The following individuals are exempt from paying advance tax:
- Senior Citizens: Individuals aged 60 years or above who do not have income from business or profession.
- Taxpayers with Tax Liability Below ₹10,000: If the total tax liability after TDS is less than ₹10,000, advance tax is not applicable.
Advance Tax Payment: Refund
- If the advance tax paid is higher than the total tax liability, the taxpayer may be eligible for a refund.
- Refunds are processed by the Income Tax Department after the filing of the Income Tax Return (ITR).
- Interest under Section 244A may be applicable on the refund amount if the refund is delayed.
- The refund can be tracked through the Income Tax Department’s e-filing portal.
What is the Interest on Late Payment of Advance Tax?
Late payment of advance tax attracts interest under Sections 234B and 234C of the Income Tax Act.
Section | Condition | Interest Rate |
234B | If at least 90% of the total tax is not paid before the financial year ends | 1% per month on the outstanding tax amount |
234C | If advance tax instalments are not paid as per schedule | 1% per month on the shortfall amount |
Interest is computed on a simple interest basis and is applicable from the due date of the instalment until the date of actual payment.
Benefits of Advance Tax
- Eases financial burden: Paying tax in instalments helps in managing cash flow effectively.
- Avoids interest penalties: Timely payment reduces interest liabilities under Sections 234B and 234C.
- Enhances tax compliance: Ensures systematic tax payments as per statutory deadlines.
- Boosts government revenue: Helps the government maintain a steady inflow of funds throughout the year.
- Applicable to various taxpayers: Covers salaried individuals, freelancers, and businesses with specified tax liabilities.
Conclusion
Advance tax is an important compliance requirement under the Income Tax Act. It applies to individuals and entities with a tax liability exceeding Rs. 10,000 in a financial year. Timely payment of advance tax helps in avoiding interest penalties and managing tax obligations effectively. Taxpayers can pay advance tax through designated bank branches or the online tax payment portal provided by the government.
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Frequently Ask Questions
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Who should pay advance tax?
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Advance tax is applicable to individuals, self-employed professionals, businesses, and corporate entities whose total tax liability exceeds Rs. 10,000 in a financial year.
When should I pay advance tax?
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Advance tax is paid in instalments as per the schedule:
- 15% of the total tax liability by 15th June
- 45% of the total tax liability by 15th September
- 75% of the total tax liability by 15th December
- 100% of the total tax liability by 15th March
Are people over the age of 60 exempt from paying advance tax?
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Senior citizens aged 60 years and above who do not have income from a business or profession are exempt from paying advance tax.
Is an NRI liable for payment of advance tax?
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Non-Resident Indians (NRIs) are liable to pay advance tax if they have taxable income exceeding Rs. 10,000 in India.
How to check advance tax payment status?
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The advance tax payment status can be checked through the Income Tax Department’s e-filing portal by using the Challan Identification Number (CIN) or through the bank’s online payment portal.
I made a mistake in my advance tax challan. How can I correct it?
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Taxpayers can request a correction by submitting a request to the bank where the tax payment was made or by submitting an online request through the Income Tax e-filing portal.
How to use the challan correction feature?
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The challan correction feature can be accessed through the e-filing portal of the Income Tax Department. Corrections can be requested for details like Assessment Year, PAN, and tax amount.
Can I pay advance tax after the due date?
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Yes, advance tax can be paid after the due date, but interest under Sections 234B and 234C may be applicable for delayed payment.
Is there a cap on how much advance tax must be paid?
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There is no upper limit on advance tax payment. The taxpayer must ensure that the advance tax paid covers at least 90% of their total tax liability for the financial year to avoid interest under Section 234B.
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