Advance Tax

Advance tax, often referred to as "pay-as-you-earn" tax, is the method of paying income tax in instalments throughout the financial year rather than as a lump sum at the year’s end. This system ensures timely collection of taxes, improves cash flow for the government, and reduces the financial burden on taxpayers. It is calculated based on projected earnings and is payable as income is received, making it particularly relevant for businesses, freelancers, and professionals with variable income sources. This approach helps taxpayers align their tax payments with their earnings schedule.

• Advance tax is income tax paid in instalments during the financial year.
• It applies to taxpayers with annual tax liability exceeding Rs. 10,000.
• Payments are made quarterly, based on income projections.
• Helps avoid a large tax burden at year-end.
• Mandatory for businesses, professionals, and individuals with non-salaried income.
• Ensures timely revenue collection for the government.

Advance tax is a system of paying income tax in instalments throughout the financial year as income is earned, rather than in a lump sum at the end of the year. It is commonly referred to as the "pay-as-you-earn" tax system. Applicable to taxpayers with a tax liability exceeding Rs. 10,000 in a financial year, it is especially relevant for individuals, professionals, and businesses earning income outside of a regular salary, such as from freelancing, investments, or business profits.

This tax system ensures steady revenue for the government while reducing the year-end financial burden for taxpayers. Payments are made quarterly according to a pre-determined schedule, facilitating better tax compliance and financial planning.

Advance tax, also known as "pay-as-you-earn" tax, is the process of paying income tax in instalments throughout the financial year, based on income received. It ensures that tax liabilities are settled in a timely manner, reducing the burden at the year-end and promoting regular government revenue collection.

Key Points:

• Definition: Advance tax is the income tax paid in instalments during the financial year, aligning with income earned periodically.
• Applicability: Required for taxpayers whose total tax liability exceeds Rs. 10,000 annually, except for salaried individuals whose taxes are deducted at source (TDS).
• Payment Schedule: Instalments are due quarterly, with specific deadlines for each.
• Relevance: Essential for businesses, professionals, and individuals with non-salaried income sources.
• Objective: Helps taxpayers manage their finances efficiently and avoids penalties for late payment of taxes.

Calculating advance tax involves estimating your total income for the financial year, computing the
tax liability based on applicable tax slabs, and subtracting eligible deductions and tax credits. This calculation ensures that you pay taxes in instalments as per your income generation pattern, avoiding penalties for underpayment.

Steps to Calculate Advance Tax:

1. Estimate Annual Income:
   • Determine income from all sources, such as salary, business, freelancing, rent, and investments.
2. Deduct Allowable Deductions:
   • Subtract deductions under sections like 80C, 80D, and other applicable provisions.
3. Compute Taxable Income:
   • Subtract exemptions like HRA and deductions from the total income to arrive at taxable income.
4. Apply Tax Slabs:
   • Calculate tax liability based on the applicable income tax slab rates.
5. Account for TDS/TCS:
   • Deduct any tax already deducted at source (TDS) or collected at source (TCS) from your tax liability.
6. Determine Advance Tax Liability:
   • If the total tax liability exceeds Rs. 10,000 for the year, advance tax payments are required.
7. Divide Payments as per Schedule:
   • Split the calculated tax amount into instalments as per the prescribed due dates (June 15, September 15, December 15, and March 15).

This process ensures accurate and timely payment of taxes, reducing the risk of penalties or interest.

Let us consider an example to understand how advance tax is calculated:

Scenario:

• Income Details:
  • Salary: Rs. 8,00,000
  • Freelancing Income: Rs. 5,00,000
  • Rental Income: Rs. 2,00,000
• Deductions:
  • Section 80C (Investments): Rs. 1,50,000
  • Section 80D (Medical Insurance): Rs. 25,000
• TDS Already Deducted: Rs. 50,000

Steps to calculate:

1. Calculate Total Income:
   • Salary (Rs. 8,00,000) + Freelancing (Rs. 5,00,000) + Rental (Rs. 2,00,000) = Rs. 15,00,000
2. Apply Deductions:
   • Rs. 15,00,000 - Rs. 1,50,000 (80C) - Rs. 25,000 (80D) = Rs. 13,25,000 (Taxable Income)
3. Calculate Tax Liability:
   • Using applicable slab rates:
     • 0-Rs. 2,50,000: 0% = Rs. 0
     • Rs. 2,50,001-Rs. 5,00,000: 5% = Rs. 12,500
     • Rs. 5,00,001-Rs. 10,00,000: 20% = Rs. 1,00,000
     • Rs. 10,00,001-Rs. 13,25,000: 30% = Rs. 97,500
   • Total Tax = Rs. 12,500 + Rs. 1,00,000 + Rs. 97,500 = Rs. 2,10,000
4. Subtract TDS:
   • Rs. 2,10,000 - Rs. 50,000 = Rs. 1,60,000 (Advance Tax Liability)
5. Divide into Instalments:
   • Pay advance tax as per the schedule:
     • 15th June: 15% of Rs. 1,60,000 = Rs. 24,000
     • 15th September: 45% of Rs. 1,60,000 = Rs. 72,000
     • 15th December: 75% of Rs. 1,60,000 = Rs. 1,20,000
     • 15th March: 100% of Rs. 1,60,000 = Rs. 1,60,000

This breakdown ensures compliance with advance tax regulations, avoiding penalties for late or insufficient payment.

Why is advance tax important?

Advance tax refers to paying income tax in installments during the same financial year in which the income is earned, instead of waiting until year-end. Taxpayers must estimate their total annual income, calculate the expected tax liability, and pay it at specified intervals. This ensures timely tax compliance, avoids interest or penalties, and helps the government maintain steady revenue flow.

What are the due dates for paying advance tax instalments?
Advance tax must be paid in four instalments during the financial year. The due dates are the same for salaried individuals, freelancers, businesses, and NRIs:

• June 15 – Pay at least 15% of total advance tax liability

• September 15 – Pay at least 45% of total liability

• December 15 – Pay at least 75% of total liability

• March 15 – Pay the full 100% of advance tax liability

Which form is required for paying advance tax?
To pay advance tax, taxpayers must use Challan No. ITNS 280, filed on the prescribed due dates. Key details to be filled include:

• PAN details: Ensure accuracy, as errors may credit tax to someone else’s account.

• Assessment Year: Choose the correct year for which advance tax is being paid.

• Type of payment: Select advance tax if paying during the financial year based on estimated income, or self-assessment tax if paying after year-end.

After payment, a Challan Identification Number (CIN) is generated. Keep it safe for income tax return filing and verify that the payment reflects in the IT department’s records.

What is the Interest on Late Payment of Advance Tax?

If you fail to pay advance tax on time, the Income Tax Act imposes interest under two sections:

1. Interest under Section 234B
By March 31, you must pay at least 90% of your total tax liability through advance tax or TDS/TCS. If this condition is not met, you will be charged 1% interest per month on the unpaid amount until the payment is made.

2. Interest under Section 234C
If quarterly instalments of advance tax are not paid on time, interest is charged as follows:

Advance tax ensures timely tax payments, distributing the liability across the financial year. This proactive approach minimises last-minute financial burdens and prevents penalties. By accurately estimating income and following the payment schedule, taxpayers can maintain compliance and financial discipline. Understanding and managing advance tax effectively promotes smoother financial planning and stress-free taxation.

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