Advance Tax – Meaning, Benefits, Formula, And Easy Steps

Paying the tax dues in advance over the financial year is better than leaving it for the last minute, which can be stressful. Calculating the tax liability and paying it is a cumbersome process and being regular with payments can help avoid the rush at the end of the financial year.

When you pay the income tax in advance instead of paying a lump sum at the end of the year, it is known as an advance tax payment. It is a kind of ‘pay tax as you earn’ and the payments are made in instalments on or before the due dates as determined by the Income Tax Department.

What is Advance Tax?

As the name indicates, it refers to paying a part of your income tax liability before the end of the financial year. You may make an advance payment if your tax liability for a financial year exceeds INR 10,000.

Generally, paying tax in advance is applicable if you earn income other than salary, which includes but is not limited to income from rent, capital gains, lottery winnings, fixed deposits, and much more.

The tax should be paid in the same financial year during which the income is earned.

How to calculate advance tax payment?

To calculate the tax liability, you may follow these steps:

• Estimate the income from interest on fixed deposits, rent, capital gains, and business.
• Add your income from salary to determine gross taxable earnings.
• Calculate the income tax liability based on your relevant income tax slab rate.
• Deduct any applicable tax deducted at source (TDS) or the amount that is already deducted.

If the tax liability based on the above calculation exceeds INR 10,000, you need to pay the tax in advance.

Advance Tax Installment = (Estimated Total Tax Liability) / 4

Steps to Calculate Advance Tax:

Estimate Your Total Income: Add up all your income sources for the financial year.
Deduct Allowable Expenses: Subtract any eligible deductions from your total income.
Calculate Taxable Income: Determine your taxable income by subtracting exemptions from your adjusted total income.
Apply Tax Rates: Use the applicable tax slabs to calculate the tax payable on your taxable income.
Consider Surcharges and Cess: Add any surcharges or cess levied on your tax amount.
Estimate Total Tax Liability: Determine your estimated total tax liability for the financial year.
Calculate Installments: Divide your estimated total tax liability by 4 to get the amount for each installment.

Example:

If your estimated total tax liability for the financial year is ₹50,000, then each advance tax installment would be:

Advance Tax Installment = ₹50,000 / 4 = ₹12,500

Note, this is a very simplistic way of calculating advance tax. Do check appropriate calculations, provisions, and applicable deductions.

Alternatively, you can use an online calculator to determine the advance income tax amount. To calculate the estimated tax liability, input your details, such as name, residential status, taxable income, age, TDS on salary, and financial year for which you are making the advance payment.

Based on this information, the online calculator will provide the tax liability for the given financial year.

Who is liable to pay advance tax?

Business owners, salaried individuals, and freelancers

If your income tax liability for a financial year is INR 10,000 or more, you are liable to pay advance income tax. However, if you are older than 60 years and do not have any business income, you are exempt from paying tax in advance.

Presumptive income for professionals

Professionals like lawyers, medical practitioners, architects, and others come under the presumptive scheme under Section 44ADA of the Income Tax Act, 1961.

You need to pay the tax in advance as a single instalment on or before 15th March. Alternatively, you may pay the income tax before 31st March of the financial year.

Presumptive income for businesses

If you have opted for the presumptive tax scheme under section 44AD of the Income Tax Act, 1961, you must pay the entire tax in advance on or before 15th March.

You can also pay the total tax liability before 31st March of the financial year.

Advance tax payment due dates and payable amount

The due dates to pay advance tax if you are self-employed or a businessperson are as follows:

Advance tax payment due dates for companies

Process for paying advance tax online

You can pay advance tax online by following the below-mentioned steps:

• Visit the official website of Tax Information Network (TIN)
• Click on ‘Services’ – epayment: Pay Taxes Online
• Choose the accurate challan to pay the income tax
• Fill in the required details like assessment year, bank name, address, email ID, contact number, and captcha
• Pay the tax once you are directed to the bank’s net banking page

You will receive the details and the challan number once the payment is successfully completed.

How to make advance tax payment offline

You can also pay the income tax as advance tax at any of the branches of authorized banks. Fill in the details, check the relevant boxes on the form, and submit it along with challan 280 and the tax payment (as cash or check).

Moreover, ensure you take the receipt for the advance payment before leaving the counter.

Some of the banks that are authorized to collect such tax payments include:

Benefits of paying advance tax

• Offers peace of mind as you do not have to worry about any financial distress to pay the tax at the last moment.
• Enables systematic financial management while allowing you to estimate your annual income.
• Quickens the tax collection procedure.
• Advance tax online payments ensure there are no defaults that have severe consequences.
• Increases government earnings via interest on the amount collected as tax advances.

What are the tax exemptions in paying advance tax payments?

• Senior citizens aged 60 years and above are exempt from paying such tax advances.
• If TDS during the year exceeds your total tax liability, you do not have to pay any tax in advance.
• If you are salaried and fall under the TDS net, no advance payments of income tax are required.

What if excess advance tax payment is done?

During the financial year, if you make excess tax payments exceeding the mandatory limits, the Income Tax Department will refund the additional amount.

In addition to the extra amount, the department pays 6% per annum as interest for any payments that are more than 10% of the mandatory limits. The refund is directly credited to your registered bank account.

Refund in advance tax payment

At the end of the financial year, if the Income Tax Department assesses that you have paid the extra tax, the excess amount will be refunded.

To claim the refund, you will have to complete Form 30 and submit it to the relevant authority. The claim must be filed within one year from the last date of the assessment year.

About deferred advance tax payment

Failing to pay the tax in advance can attract a fine. If you miss the deadline or pay less than the required amount, a simple interest of 1% is levied on the balance tax amount.

The interest is applicable until you pay the outstanding tax amount in full. The tax in advance must be paid once every quarter during a financial year.

If you fail to pay your advance tax by the due date, you will be charged a penalty of 1% per month for the first three months of delay. This penalty is calculated on the outstanding tax amount.

Important points to remember:

• The penalty can increase to 2% per month after the first three months of delay.
• In addition to the interest, you may also be subject to other penalties or legal actions if you fail to pay your taxes on time.

Frequently Asked Questions (FAQs)

When should you pay advance tax?

If your annual tax liability after TDS is INR 10,000 or more, you must pay advance income tax online or offline.

Are Non-Resident Indians (NRIs) liable to pay advance tax?

NRIs with accrued income exceeding INR 10,000 for a financial year are liable to pay income tax in advance.

What are the payment modes available for paying advance tax?

You can pay the income tax in advance either online via the official website of TIN or by submitting challan 280 at any branch of an authorized bank.

Are section 80C deductions available while calculating taxable income to pay advance tax?

Yes, you can consider the available tax benefits under section 80C of the Income Tax Act, 1961 to calculate your taxable income for the financial year before determining any advance income tax liability.

Will any tax paid until 31st March of a financial year be considered as advance tax payment?

Yes, all taxes paid until 31st March of a financial year are considered advance income tax payments.