Accounting & Taxation

What is Advance Tax?

Whether you are a salaried individual, a professional or a business owner, “Advance Tax” is a term that is best to get acquainted with early on in your financial journey. To educate the taxpayers, our experts have compiled a list of frequently asked questions that they receive during tax filing season.

Q1. What is Advance Tax?

Advance Tax also informally referred to as Pre-paid Tax falls under the “Pay as you earn” scheme of section 207-211 of the Income Tax Act. Under this scheme, tax is to be paid during the course of the year in which income is earned, even though such income is taxed in the following Financial Year (FY).

For example, the salary you earned in the financial year 2021-22 will be taxed in the financial year 2022-23 - which is when you will file your Income Tax return. However, in this case, if advance tax is applicable, you will pay the advance tax in the FY in which the income is earned i.e. FY 2021-22.

Q2. Do I need to pay advance tax?

If your total income i.e. salary earnings, profits from business, income from house property, income from capital gains on the sale of securities, property, etc., and other sources results in a total tax liability of Rs. 10,000 or more (which is very likely) you should pay tax in advance to avoid the interest penalty at the end of the year.

Q3. Why do I need to pay advance tax?

Advance Tax helps the government maintain liquidity and it reduces taxpayers’ burden of taxation – allowing them to pay in instalments rather than the whole tax at one go at the end of the financial year. It also helps the taxpayer save on the interest penalty that will accrue in case of non-payment of advance tax.

Q4. When should I pay advance tax?

Advance tax is payable in instalments during the same FY in which income is earned. The due date of instalments and amount payable is shown in the table below:

Due Dates for Advance Tax

Q5. I earn income from my salary, do I need to pay advance tax?

For individuals who earn salary income only, the liability to pay advance tax does not arise as long as Tax Deducted at Source (TDS) is already deposited by your employer.

To check how much TDS is already deposited by your employer, you can check the TDS details mentioned in your Form 16.

However, if you generate income in addition to your salary, for example - rental income, freelancing revenue, capital gains from the sale of property, stocks, mutual funds, etc. you will be liable to compute the tax liability for that particular Financial Year (FY) and deposit the same with the tax department as per the installment due dates.

Let’s say Raj draws a salary from DDLJ Private Limited and also receives rent (without deduction of TDS) from his ancestral property during the Financial Year (FY) 2021-22. This income will be taxed in FY 2022-23 (also called Assessment Year), however, his advance tax becomes payable in the current FY 2021-22.

Q6. Can I be exempt from payment of advance tax?

Yes, if you are a senior citizen (60 years and above) resident in India and you do not have a business or professional income, then you are exempt from payment of advance tax.

Q7. How can I calculate the amount of Advance Tax to be paid?

You can perform the following steps to arrive at an estimated tax liability

  • Estimate the total income of the current year
  • Calculate tax on such estimated income at the notified rate(s) of tax
  • Add: surcharge and cess to the amount calculated in step 2 above
  • Less: Relief for salary arrears, double taxation, MAT credit, and AMT credit, if applicable (section 89,90,90A &91)
  • Less: Tax-deductible or collectible at source (TDS/ TCS)
  • Less: Minimum Alternate Tax (MAT) credit or Alternate Minimum Tax (AMT) credit, if applicable (section 115JAA, 115JD)
  • Balance amount, if Rs. 10,000 or more, is the advance tax payable

You may also use an advance tax calculator to compute the tax liability.

Q8. I forgot to pay my advance tax; Do I have to pay interest/ penalty?

Non-payment of advance tax attracts a penalty under two sections i.e. Penalty for default in payment under Section 234 B and Penalty for short payment under Section 234C.

Q9. What is section 234 B? How is the interest under section 234 B calculated?

Under Section 234 B, a taxpayer who is liable to pay advance tax but fails to do so has to pay a penalty for such default. Simple interest @ 1% per month is levied from the 1st of April following the FY in which advance tax was due.

Let’s say Anjali an entrepreneur has a tax liability of  Rs. 50,000. She has not paid any advance tax but there is a TDS creditof Rs. 10,000 in her account. She has paid the balance tax on 31st July i.e. at the time of filing the return of income. Will she be liable to pay interest under section 234B, if yes, then how much?

In this case, the tax liability (after allowing credit of TDS) comes to Rs. 40,000 (i.e. Rs. 50,000 – Rs. 10,000) which exceeds Rs. 10,000 and hence, she will be liable to pay advance tax.

Interest under section 234B will be levied at 1% per month or part of the month. In this case, Anjali has paid the outstanding tax on 31st July, and hence, interest under section 234B will be levied for the period from 1st April to 31st July i.e. for 4 months.

Interest Calculation :

40,000 x 1% x 4 = Rs. 1,600.

*To explain the concept of TDS credit, lets’s say Anjali provides professional services to Rahul for Rs. 1 lakh. Rahul pays Rs. 90,000 to Anjali and deposits TDS under section 194J at 10% i.e. Rs. 10,000 with the government. In this case, Anjali has a TDS credit of Rs. 10,000

Q10. What is section 234 C? How is the interest under section 234 C calculated?

Section 234C provides for levy of interest for default in payment of instalment(s) of advance tax. In other words, If the advance tax paid is less than the stipulated amount, interest under section 234C shall be calculated as tabulated below:

Interest applicable on default in payment of advance tax instalments

In the case of taxpayers opting for the presumptive tax scheme, if the advance tax paid on or before 15th March is less than the tax due, simple interest @ 1% shall be payable on the amount of shortfall.

Let’s say Simran is running a retail shop. Her Tax Liability is Rs 1,00,000. She has paid advance tax as follows:

Rs. 20,000 on 15th June,

Rs. 5,000 on 15th September,

Rs. 50,000 on 15th December,

Rs. 10,000 on 15th March

Q: Simran has not opted for the presumptive taxation scheme of section 44AD. Will she be liable to pay interest under section 234C, if yes, then how much?

A: Yes, Simran will be liable to pay interest based on the shortfall in the instalments due. The interest calculation is tabulated below:

Example calculation for Advance Tax

The total interest payable for Simran under section 234 C is Rs. 1,050

Q11. I sold some stocks during the year but failed to pay advance tax instalments required under section 234 C. Can I pay the full amount before the 15th of March?

Yes, Interest under section 234C is not levied, if, the shortfall in payment of advance tax is due to failure to estimate the amount of capital gains or income referred to in section 2(24)(ix) (i.e. winning from lotteries, crossword puzzle, etc.) or income from a business or dividend income and the taxpayer pays the required advance tax on such income as a part of immediate following instalments or till 31st March if no instalment is pending.

Q12. How can I pay advance tax online?

Advance tax can be paid on the Tax Information Network of the Income Tax Department by performing the following steps :

Step 1: Go to link

Step 2: Select CHALLAN NO./ITNS 280 and click Proceed

Step 3: Fill in the details and pay via net banking or debit card

Step 4: Download the challan and save it as the details are to be entered at the time of income tax return filing

Most taxpayers aren't aware of Advance Tax till the time they end up paying an interest penalty against it. We think it's important to be aware of the concept and to review your earnings every quarter to estimate the advance tax liability - And hey! Reviewing your earnings every quarter doesn’t hurt much and is actually a great habit to cultivate! :)

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