Advance Tax in India - A Complete Guide

 

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A Complete Guide to Advance Tax in India

What is Advance Tax?

Advance Tax, often referred to as the "pay-as-you-earn" tax, is the income tax that needs to be paid in installments rather than as a lump sum at the end of the financial year. This system ensures that the government gets a steady flow of income throughout the year, while taxpayers avoid the burden of paying a large amount at once.

Advance tax applies to all taxpayers, including individuals, self-employed professionals, companies, and corporations. The rule is straightforward: if your estimated tax liability for the financial year exceeds ₹10,000, you are required to pay advance tax.

 

Who Should Pay Advance Tax?

Advance tax is applicable to:

• Salaried individuals with sources of income other than salary (like interest, capital gains, or rental income).
• Freelancers, self-employed individuals, and business owners who do not receive a regular salary.
• Companies and corporates.
• Those involved in speculative businesses like trading in stocks or commodities.

It is important to note that if your only source of income is from salary, your employer typically handles the tax payment via Tax Deducted at Source (TDS). However, if you earn income from multiple sources, you may be required to pay advance tax on the non-salary components.

 

How to Calculate Advance Tax?

To calculate your advance tax, follow these steps:

1. Estimate Total Income: Compute your total income from all sources, including salary, business income, interest, and capital gains.
2. Deduct Exemptions and Deductions: Subtract eligible deductions under Sections 80C to 80U (like those for investments in PPF, life insurance, etc.) and applicable exemptions.
3. Calculate Tax Liability: Use the appropriate income tax slab for the financial year to determine your tax liability.
4. Subtract TDS: If you have any TDS deducted on income, reduce it from the total tax liability.
5. Pay Advance Tax: If the balance tax liability after TDS exceeds ₹10,000, pay advance tax as per the schedule provided below.
   

 

Due Dates for Advance Tax Payment

The Income Tax Department has outlined a clear schedule for advance tax payment for both individuals and corporates:

For Individuals and Corporates

• On or before 15th June: 15% of the total tax liability.
• On or before 15th September: 45% of the total tax liability.
• On or before 15th December: 75% of the total tax liability.
• On or before 15th March: 100% of the total tax liability.

If you are an individual with only presumptive income from business (under Section 44AD or 44ADA), you need to pay the entire 100% of the tax liability by 15th March.

 

How to Pay Advance Tax Online?

Paying advance tax is quite simple. Here’s how you can do it online:

1. Visit the official Income Tax website
   
2. Choose the option to e-Pay Tax in quick links.
3. Enter your PAN and Mobile Number then enter the OTP which you received.
   
4. Select "Income Tax" box and click proceed
5. Select the ‘Assessment Year’ and ‘Type of Payment’ as ‘Advance Tax (100)’ and click on 'Continue'.
6. Enter Tax Amounts details.
   
7. Complete the payment through your payment method.
   
8. After payment, ensure you save a copy of the receipt for future reference.

 

Consequences of Failing to Pay Advance Tax

Failure to pay advance tax on time may result in interest penalties under Sections 234B and 234C of the Income Tax Act:

• Section 234B: If you fail to pay 90% of your total tax liability by the end of the financial year, you will incur a penalty of 1% per month on the outstanding tax amount.
• Section 234C: If you do not pay advance tax as per the prescribed installments, an interest penalty of 1% per month is levied on the shortfall.

 

Refunds on Advance Tax

If you've paid more advance tax than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR). The excess amount will be refunded to you after verification by the Income Tax Department, and if the refund amount is significant, you may also be entitled to receive interest on the refund.

 

Conclusion

Advance tax helps in the smooth functioning of the tax system and allows taxpayers to spread out their tax liability across the year. By paying taxes in advance, you can avoid penalties and ensure that you’re compliant with the law. If you’re unsure of your tax liabilities or how much advance tax to pay, it's always a good idea to consult a tax advisor to guide you through the process.

Ensure timely payments to avoid interest charges, and stay on top of your financial commitments!