What is Advance tax: how to calculate and file it

As a taxpayer, you have to pay taxes to the Indian Income Tax department, but you can do so in two ways. Firstly, you can file a return at the end of the financial year and pay your tax dues. Alternatively, you can estimate your tax liability in advance based on your income, investments, and deductions and start paying your tax in parts throughout the financial year. Since you are paying the tax due in advance, this method or system is known as paying advance tax.

Understand advance tax applicability in detail

As a salaried individual, you are not liable to pay advance tax. It is because your employer levies TDS on your salary every month based on your investment and expenditure declarations. In turn, they submit this information to the income tax department regularly.

However, if you have varied sources of income as a salaried individual, are a professional, or a businessman, irrespective of TDS, you will have to file advance tax if you have a hefty tax liability. Moreover, if you win a lottery or earn capital gains on your shares, in the absence of TDS, you will have to pay advance tax on these incomes, too, after adjusting them with your expenses or losses.

To put it simply, businesses or corporates whose income is spread across varying sources have a high tax liability. So, advance tax's applicability is more prominent as it avoids last minute discrepancies and helps maintain transparency all through the financial year. To elaborate further, as per income tax regulations, if your tax liability exceeds Rs. 10,000 in a financial year, then you will have to pay an advance tax under Section 208. Senior citizens who do not have a business or profession are exempt from paying advance tax.

How to calculate advance tax?

Any salaried individual, businessman, or professional whose tax liability in a year exceeds Rs. 10,000, have to pay advance tax. Moreover, NRIs fetching an income from India with a tax liability of more than Rs. 10,000 have to pay advance tax. On the other hand, if you have registered your company or business under the presumptive taxation scheme outlined in Sections 44AD and 44ADA, you do not have to pay advance tax provided your income stays within Rs. 2 crore threshold in one financial year.

What are the due dates for advance tax?

All taxpayers eligible to pay advance tax have to pay up to 15% advance tax by 15th June, up to 45% advance tax by 15th September, up to 75% by 15th December, and up to 100% advance tax by 31st March.

How to file advance tax in FY 2024-2025?

Given the above advance tax payment due dates, you will have to estimate your current income and your investments for deductions and then derive your advance tax payment figure. You can use the Income tax calculator available online at Bajaj Finserv to calculate your tax obligation for the financial year 2024-25. You will have to enter a few basic details in this calculator about your income and investments to arrive at the amount you need to pay.

After paying the first, second, and third installment of advance tax, if there is a change in your tax liability, you can revise the amount you were to pay as advance tax in your next installment payment. Moreover, when calculating your liability, do not forget to consider the tax relief allowed under Section 90 or Section 90A, deductions under Section 91, and tax credits allowed under Section 115JAA or Section 115JD. If you are eligible for any of these or all, you must account for them when calculating your final tax liability.

How to pay advance tax?

If you fail to pay advance tax or the assessing officer at the Income Tax department finds that you paid an amount lower than your tax liability as advance tax, you will receive a notice regarding the same. This notice is an order that the assessing officer passes under Section 210(3). On receiving this notice, if you see that your estimate of tax liability is lower than that of the assessing officer, you will have to submit your estimate basis the advance tax calculation to justify your claim. You can raise such a claim via Form No. 28A addressed to the assessing officer.

Alternatively, suppose you understand that you have paid lower than what you should have paid. In that case, you must go ahead and pay the difference amount immediately as per the assessing officer's directive. To pay your advance tax online, you can turn to websites of banks empanelled with the Income Tax Department of India. Alternatively, you can deposit with the National Securities Depository online.

What is the penalty for not paying advance tax on time?

If you are liable to pay advance tax and pay less than your total liability of the first or second installment, you will have to pay interest on the defaulted amount at 1% simple interest per month for three months. However, if you pay less than what you’re supposed to as the last installment, then the 1% interest on the defaulted amount will be calculated for every month until the time you clear your dues in full.

On the other hand, if you pay higher advance tax than your total liability, you will receive a refund of the excess amount. Furthermore, if your exceeding amount is above 10% of your liability, you will receive 6% interest on the exceeding proceeds from the Indian Income Tax department.

Advance tax: An example

Keeping the above terms and conditions in mind, here is an example elaborating how advance tax works.

Assume that you are an architect, and for the financial year 2019–20, your tax liability will be Rs. 1 lakh. As per the first installment cut-off for advance tax, you will have to pay 15% of Rs. 1 lakh by 15th June 2019, which comes to Rs. 15,000. Similarly, you must pay 45% of Rs. 1 lakh in your next installment, i.e., Rs. 45,000. Since you have already paid Rs. 15,000, you will have to pay only Rs. 30,000 by 15th September 2019. In line with this system, you will have to clear 75% of Rs. 1 lakh by 15th December 2019 and 100% as the fourth installment by 15th December 2019. However, you will only have to pay Rs. 25,000 as your last installment if you make timely advance tax payments through the year.

So instead of having your tax liability throw your finances off track, use data from the past years to devise a plan for the coming year and manage your tax liability effortlessly through advance tax.