Advance tax is a key part of the Indian tax system that requires taxpayers to pay a portion of their tax bill before the financial year wraps up. This system helps ensure a steady flow of revenue for the government and spares taxpayers from the stress of a hefty lump-sum payment at year-end. Grasping the details of advance tax is essential for both individuals and businesses to stay compliant and dodge any penalties.
What is Advance Tax?
This is commonly known as the “pay-as-you-earn” tax, asks taxpayers to estimate their annual income and pay taxes in installments throughout the year. This method syncs tax payments with income as it comes in, making it easier for the government to collect revenue on time.
Applicability of Advance Tax
According to the Income Tax Department of India, anyone whose estimated tax liability for the financial year exceeds ₹10,000 must pay advance tax. This includes:
Salaried Individuals: Even though employers deduct Tax Deducted at Source (TDS) from salaries, individuals with extra income from sources like interest, dividends, or capital gains may need to pay advance tax if their total tax liability goes over ₹10,000.
Freelancers and Professionals: Those earning from professions like consulting, legal services, or freelancing should evaluate their tax liability and pay advance if it exceeds the set threshold.
Businesses: Both small and large companies must adhere to advance tax rules if their tax liability surpasses ₹10,000.
However, resident senior citizens aged 60 and above, who don’t earn income from a business or profession, are exempt from paying advance tax.
Due Dates and Installments
The Income Tax Department has set specific due dates for paying advance tax in installments:
– By June 15th: You’ll need to pay 15% of your estimated tax liability.
– By September 15th: This is when 45% of your estimated tax liability is due.
– By December 15th: You should have paid 75% of your estimated tax liability by now.
– By March 15th: Finally, you’ll need to settle the full 100% of your estimated tax liability.
These installments help taxpayers spread out their tax payments over the year, making it easier on their finances.
Calculation of Advance Tax
To calculate Advance tax accurately, you need to estimate your total income for the financial year from all sources, such as salary, business income, capital gains, and other taxable income. Here’s how to do it:
Estimate Total Income: Add up all your income sources.
Deduct Allowable Deductions: Use deductions from sections like 80C, 80D, and others.
Compute Tax Liability: Apply the relevant tax rates to your net taxable income.
Subtract TDS: Deduct any TDS that has already been taken out or is expected to be deducted.
Determine Advance Tax Payable: If your tax liability is over ₹10,000, calculate the advance tax due based on the due dates and percentages mentioned earlier.
For accurate calculations, taxpayers can use the Advance Tax Calculator found on the Income Tax Department’s official website.
Payment Procedure
Taxpayers have the option to pay their Advance tax either online or offline:
Online Payment:
Start by visiting the e-Filing portal of the Income Tax Department.
Look for the ‘e-Pay Tax’ option.
Enter your Permanent Account Number (PAN) and complete the OTP verification.
Next, fill in the required details, choose the appropriate tax payment category, and go ahead with the payment using net banking, a debit card, or any other available methods.
You can find detailed guidelines on the Income Tax Department’s website.
Offline Payment:
First, get the challan form (Challan 280) from designated banks or download it from the Income Tax Department’s website.
Fill in the necessary information, including your PAN, assessment year, and the tax amount.
Then, submit the form along with the tax amount at authorized bank branches.
Don’t forget to collect the stamped challan receipt after making the payment for your records.
Consequences of Non-Compliance:
If you fail to pay your Advance tax or underpay, you could face interest penalties under Sections 234B and 234C of the Income Tax Act:
Section 234B: This section imposes interest if you default on your advance tax payments.
Section 234C: This section imposes interest for delaying your advance tax installments.
To steer clear of these penalties, it’s crucial to stick to the advance tax payment schedule.
Recent Developments and Updates:
As of March 17, 2025, net direct tax collections in India have jumped by 13.13% to ₹21.3 trillion, thanks to a notable rise in advance tax collections, which increased by 14.6% to ₹10.4 trillion. This growth highlights the increasing compliance and awareness among taxpayers regarding their advance tax responsibilities.