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What is Advance Tax? – Meaning, importance and calculation

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What is Advance Tax? – Meaning, importance and calculation
January 16, 2024

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Advance tax payment is an essential financial obligation that certain individuals and businesses have towards the government. It involves paying a portion of the annual tax liability in advance, rather than paying it all at once at the end of the financial year. Anyone with a tax liability of Rs. 10,000 or higher, must pay advance tax as per Section 208 of the Income Tax Act.

This article will provide a comprehensive overview of the meaning of advance tax in addition to its calculation process, examples, importance, payment methods, benefits, required forms, due dates, and late payment interest.

What Is Advance Tax?

Advance tax is a way of fulfilling one's tax liability by proactively making payments to the government before the financial year ends. It is also known as the ‘pay as you earn’ tax because it requires certain taxpayers to make estimated tax payments around the year based on their expected income.

The advance tax liability applies to both individuals and businesses, ensuring a steady flow of revenue for the government and preventing a sudden burden on taxpayers at the last moment. Taxpayers whose income exceeds Rs. 10,000 in a financial year (after deducting TDS) must pay advance tax in instalments on specified due dates.

How to Calculate Advance Tax?

As per the tax structure in India, individuals and businesses are taxed based on their applicable income tax slabs. Calculating advance tax involves estimating one’s total income for the financial year and determining the tax liability as per the tax slab.

To calculate advance tax, you must follow the following steps:

Step 1: Compute gross total income by adding up your income from salary, house property, business or profession, capital gains, and other sources.

Step 2: Subtract the applicable Chapter VIA deductions from gross total income.

Step 3: Calculate the rebate under Section 87A if applicable and deduct the same from above.

Step 4: Then, add the surcharge amount (if any).

Step 5: Add the Health and Education Cess on the tax amount+surcharge.

Step 6: Less marginal relief (if any).

Step 7: Now, you will get your net total income.

Step 8: Calculate your tax liability on your net income based on the applicable tax slabs.

Step 9: Now deduct TDS (Tax Deducted at Source) to arrive at total income tax liability.

This total tax liability is then divided into instalment payments known as Advance tax payable as per the prescribed percentages set by the income tax department.

Example of Advance Tax Calculation

To understand advanced tax calculation better, let us consider the following example:

Mr A, a salaried individual, earns a total salary income of Rs. 10,00,000 during the financial year 2023-24. He earns Rs. 5,60,000 as income from house property. He deposits Rs. 50,000 towards his PPF account, Rs. 20,000 towards his LIC premium, and Rs. 11,000 towards his medical insurance premium. Mr A estimates Rs. 22,000 towards TDS. He has earned Rs. 15,000 in interest from fixed deposits for the financial year.

Particulars

Amount (in Rs.)

Amount (in Rs.)

Income from Salary

10,00,000

 

Income from House Property

5,60,000

 

Income from Other Sources:

Interest on Fixed Deposits

 

15,000

 

Gross Total Income

 

15,75,000

Less: Chapter VIA Deductions

Deduction U/S 80C

Contribution to PPF

LIC Premium

Deduction U/S 80D

Medical Insurance Premium

 

 

50,000

20,000

 

11,000

 

 

 

 

 

(81,000)

Net Total Income

 

14,94,000

Tax Payable

Up to Rs.2,50,000 – Nil

Rs. 2,50,001 – Rs. 5,00,000 -@5%

Rs. 5,00,001 – Rs. 10,00,000 -@20%

Rs. 10,00,001 – Rs. 14,94,000 -@30%

 

 

12,500

1,00,000

1,48,200

 

 

 

 

2,60,700

Add: Health and Education Cess @ 4%

 

10,428

Less: TDS

 

22,000

Advance Tax Payable (Rounded Off)

 

2,49,130

 

Advance Tax Payment Schedule

Due Date

Advance Tax payable

Amount (in Rs.)

15th June, 2023

15% of Rs. 2,49,130

37,369.50

15th September, 2023

45% of Rs. 2,49,130

1,12,108.50

15th December, 2023

75% of Rs. 2,49,130

1,86,847.50

15th March, 2024

100% of Rs. 2,49,130

2,49,130.00

Why Is Advance Tax Important?

Advance tax is important for both taxpayers and the government. From the taxpayers' perspective, it helps in managing cash flow as they pay taxes in instalments rather than facing a significant burden at the end of a financial year. It also ensures compliance with tax laws and avoids penalties for non-payment or delayed payment of taxes.

For the government, advance tax ensures the availability of funds throughout the year to meet various expenditure requirements and contributes to the stability of the economy.

Who Must Pay Advance Tax?

Advance tax applies to any individual, including salaried employees, freelancers, consultants, and professionals, if their total tax liability for the financial year exceeds Rs. 10,000. It is also mandatory for companies, firms, and other entities to pay advance tax if their tax liability exceeds Rs. 1,00,000 in a financial year.

Such taxpayers are required to estimate their tax liability, calculate the instalments, and pay advance tax accordingly as per the due dates specified by the income tax department.

How to Pay Advance Tax Online? 

Paying advance tax online has become convenient and hassle-free. Taxpayers can pay advance tax through various online methods, making it easy to comply with tax obligations. Here is a step-by-step guide:

Step 1: Visit the official website of the Income Tax Department or authorised online tax payment portals.

Step 2: Select the appropriate challan based on the type of taxpayer and payment category.

Step 3: Fill in the necessary details such as PAN, assessment year, payment amount, etc.

Step 4: Choose the preferred payment method – net banking, credit card, debit card, or UPI.

Step 5: Verify the payment details and proceed to make the payment.

Step 6: Save the acknowledgement slip or receipts generated after successful payment for future reference.

What are the Benefits of Paying Advance Tax?

There are several benefits to paying advance tax:

  • Avoiding Penalties:

    Paying advance tax on time helps taxpayers avoid penalties or interest on late payments.

  • Better cash Flow Management:

    Advance tax payments in instalments make it easier for individuals and businesses to manage their cash flow throughout the year.

  • Eliminating a Last-minute Tax Burden:

    By paying taxes progressively, taxpayers can avoid a sudden burden or financial strain when the financial year ends.

  • Compliance with Tax Laws:

    Paying advance tax ensures compliance with tax laws and demonstrates responsible citizenship.

  • Strengthening the Economy:

    Advance tax payments contribute to a stable economy by providing the government with a regular flow of funds to meet its expenditure needs.

Which Forms Are Required for Advance Tax?

Challan ITNS 280 is used to make advance tax payments. It is a self-assessment tax payment form that allows taxpayers to specify the tax head, the type of payment, and the assessment year. Challan ITNS 280 is used for various types of payments, including advance tax, regular assessment tax, tax on distributed profits, and more. Taxpayers must fill in the appropriate details, ensure accuracy, and make the payment within the specified due dates.

What Are the Due Dates for Payment of Advance Tax? 

Advance tax is paid in instalments throughout the financial year. The due dates for advance tax payment are as follows:

For both individuals and corporate taxpayers:

Due Date

Advance Tax Payable

On or before June 15th

15%

On or before September 15th

45% of advance tax minus advance tax already paid

On or before December 15th

75% of advance tax minus advance tax already paid

On or before March 15th

100% of advance tax minus advance tax already paid

For taxpayers opting for the Presumptive Taxation Scheme under Section 44AD &Section 44ADA:

Due Date

Advance Tax Payable

On or before March 15th

100% of advance tax

What Is Advance Tax Late Payment Interest?

If a taxpayer fails does not pay advance tax on time or pays an inadequate instalment amount, he/she is liable to pay interest for the delay or shortfall. The interest is charged under Section 234B and Section 234C of the Income Tax Act.

The interest rate is 1% per month or part of the month for which tax shortfall is observed for both sections. The interest calculation varies depending on the due date and the instalments paid. It is worth noting that interest is not levied if the advance tax is paid in full on or before the due dates.

Advance tax payment is a crucial financial obligation for taxpayers that ensures smooth revenue collection for the government and helps taxpayers manage their cash flow better. By calculating and paying advance tax on time, individuals and businesses can meet their tax obligations, avoid penalties, and contribute to the country's economic stability.

Understanding the calculation process, payment methods, due dates, and consequences of non-compliance is essential for sound tax planning.

FAQs on Advance Tax Payment

1. Who is exempt from advance tax?

Taxpayers whose total tax liability is less than Rs. 10,000 or a resident individual aged 60 years and above not having any income under the head “Profits and gains of business or profession” are exempt from paying advance tax.

2. Is an NRI liable for payment of advance tax?

Yes, an NRI is liable for the payment of advance tax if their total tax liability for the year is Rs. 10,000 or more.

3. When should I pay advance tax?

Advance tax should be paid in instalments during the financial year. If the total tax liability is Rs. 10,000 or more, the due dates for payment are June 15, September 15, December 15, and March 15.

4. How to check advance tax payment status?

You can check the status of your advance tax payment by visiting the Income Tax e-filing portal and logging in to your account. Under the 'Services' tab, select 'View Form 26AS' to see the details of your tax payments.

5. What is the penalty for missing the dates of payment of Advance Tax?

If you miss the due dates for payment of advance tax, you may be liable to pay interest under Section 234B and Section 234C of the Income Tax Act. The penalty for late payment is 1% per month on the amount of tax due.

6. How do you calculate advance tax interest?

Advance tax interest is calculated at the rate of 1% per month on the amount of tax due, for the period of delay.

7. Can I claim a deduction under Section 80C while estimating income for calculating my advance tax?

Yes, you can claim a deduction under Section 80C while estimating your income for calculating advance tax. This deduction is available for investments made in specified avenues such as LIC, PPF, NSC, etc.

ARN - INT/ED/01/24/7893

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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