What is Advance Tax Payment: Meaning and Calculation

When taxpayers’ tax liability in a financial year exceeds a certain amount, they are required to pay tax in advance rather than wait until the end of the year. This payment, made in 4 instalments, is known as advance tax. In this blog, we’ll answer what is advance tax by understanding various advance tax rules and how you can file them online in easy steps.

What is Advance Tax?

Let’s begin with advance tax meaning. Advance tax is a type of income tax you pay beforehand over 4 instalments rather than in lump sum after the end of the financial year. Taxpayers must estimate their annual income and calculate their expected tax liability in advance. If the total tax due (after TDS) comes out to be more than Rs. 10,000, they must pay a certain percentage as advance tax in four instalments – On or before 15th June, 15th September, 15th December, and 15th March to avoid interest penalties.

You may be wondering, why taxpayers need to pay advance tax instead of just settling the full amount while filing their returns at the end of the year. The reason for this is that the government wants to ensure they receive a steady flow of tax revenue throughout the year, similar to how salaried employees have TDS deducted monthly. For taxpayers who don’t have regular TDS deductions, like self-employed individuals, freelancers, business owners, and even salaried employees, the advance tax India structure makes sure taxes are paid regularly over the year.

Who Should Pay Advance Tax?

Advance tax must be paid if one’s tax liability exceeds Rs. 10,000 in a financial year, minus the TDS (Tax Deducted at Source) already deducted or expected to be deducted. So if your total tax liability after subtracting TDS is still more than Rs. 10,000, you have to pay advance tax in instalments to avoid interest penalties. The exact advance tax percentage depends on the due date announced by the Income Tax Department.

Freelancers, businesses and salaried individuals

If the annual tax liability is above Rs. 10,000 less TDS, advance tax must be paid in 4 instalments. This is because while salaried individuals receive their salaries after applicable TDS deductions, freelancers and businesses may not have regular TDS on their income. 

For example, a freelancer falling in the 30% advance tax slab may have clients who deduct only 10% TDS on payments. This creates a gap between the actual tax liability (30%) and the TDS deducted (10%), leading to tax underpayment. Thus the freelancer is required to pay the remaining tax as advance tax to avoid any penalties.

Professionals (Presumptive income)

Professions such as lawyers, doctors, and consultants, that is, those taxpayers who work independently and earn income without a fixed salary, are also required to estimate their annual income and pay advance tax if their total tax liability after TDS goes over the Rs. 10,000 limit. 

However, the advance tax slab for individual professionals opting for the presumptive taxation scheme under Section 44ADA is a bit different. Such individuals don’t need to pay their advance tax in 4 instalments. Rather, they can pay their entire tax liability in a single instalment by 15th March.

Businesses under presumptive taxation scheme

If a business has opted for the presumptive taxation scheme under Section 44AD, it is required to pay advance tax if liability exceeds Rs. 10,000. Unlike other businesses, however, those under presumptive taxation are allowed to pay their entire advance tax in one single instalment by 15th March, instead of four instalments.

NRIs

If an NRI’s total tax liability in India (from any taxable Indian sources like capital gains or rental income) exceeds Rs. 10,000 after TDS in a financial year, they must pay advance tax.

Senior citizens

Individual taxpayers aged 60 years or above are exempt from paying any advance tax, regardless of their total tax liability. However, senior citizens who have a business or professional income, need to pay advance tax if tax liability exceeds Rs. 10,000. This can be done in 4 instalments, or 1 before 15th March (under the presumptive taxation system).

Advance Tax Slabs and Rates

There isn’t a separate advance tax slab. Taxpayers need to estimate their annual income and pay a percentage of their total tax liability before different deadlines throughout the financial year. Thus, the advance tax rates are simply the same as the regular income tax slabs applicable to the taxpayer.

For example, if the estimated taxable income of an individual earning business income is Rs. 20 lakh (after subtracting TDS and deductions), they’d fall under the 30% tax bracket as per the income tax slabs. Let’s assume their tax liability for the year under the new regime would be Rs. 3 lakh. This liability must be cleared in 4 instalments over the course of the financial year.

The advance tax payment schedule is:

• 15% of total tax liability by 15th June
• 45% by 15th September
• 75% by 15th December
• 100% by 15th March

1. First instalment: 15% of Rs. 3 lakh = Rs. 45,000. This payment is due by 15th June.

2. Second instalment: 45% of Rs. 3 lakh = 1,35,000. But since Rs. 45,000 was already paid earlier, we’ll subtract it from this instalment. Thus the second advance tax payment by 15th September would be Rs. 90,000.

3. Third instalment: 75% of Rs. 3 lakh = 2,25,000. Again, since the first and second instalments already covered Rs. 1,35,000, the payment for the third instalment due by 15th December would be Rs. 2,25,000 – Rs. 1,35,000 = Rs. 90,000.

4. Fourth instalment: The taxpayer has already paid Rs. 2,25,000 by now, so the remaining tax liability, that is, Rs. 3,00,000 – Rs. 2,25,000 = Rs. 75,000 would be paid in the last instalment.

Estimating one’s income and tax liability can be tough. It’s easy to make mistakes when making advance tax payments, which can lead to interest penalties for underpayment or extra payments that could have been invested elsewhere. A tax consultant can help individuals and businesses optimise their tax savings. Their expertise can allow you to claim all eligible deductions, maintain compliance, file returns conveniently, and avoid unnecessary interest or penalties.

Advance Tax Due Dates

Now that you know who should pay advance tax let’s understand the deadlines to avoid penalties. According to advance tax rules, taxpayers (not under the presumptive taxation scheme) must pay their estimated tax liability in 4 instalments throughout the financial year.

As we saw in the example above, the percentages are cumulative, meaning we can subtract the amounts already paid in previous instalments from the total due. Also, those who have opted for the presumptive taxation scheme can pay their advance tax in a single instalment before 15th March.

Failing to pay, or delaying advance tax payments can attract penalty interest under Sections 234B and 234C of the Income Tax Act. The interest levied on outstanding tax owed can add up quickly, which is why it’s important to calculate and pay advance tax on time. With the help of our expert tax consulting services, you can accurately estimate your tax liability, plan your payments efficiently, and avoid any unnecessary interest penalties or compliance issues.

How to Calculate Advance Tax?

You can follow these steps to calculate your advance tax liability:

1. Estimate the total income for the financial year

This includes all taxable income, like professional, business, rental, capital gains, interest, dividend, salary, and so on. Since the appropriate amount of TDS is deducted from salary, salaried individuals should especially focus on other sources of income to see if their tax liability exceeds Rs. 10,000 after TDS. They will need to pay advance tax on such income.

2. Subtract any deductions

If you are planning to file taxes under the old regime, you may be eligible for several deductions on investments, loan repayments, insurance premiums, and more. Calculate these deductions and subtract them from total income to get your taxable income.

3. Calculate total tax liability

The advance tax slab depends on your actual income tax slab. Use the latest tax slab rates to calculate your tax liability for the year. Don’t forget to account for cess and any applicable surcharge.

4. TDS excluding from total tax liability

Now that you have the total tax liability, you can subtract the TDS already paid or expected along with any applicable relief (such as Section 87A) to determine the advance tax owed. If this amount exceeds Rs. 10,000, you’ll need to make advance tax payments.

Here is a general formula for calculating advance tax owed:

Advance tax owed = Estimated tax on total income – TDS – Any relief (such as under Section 87A). You can use the advance tax rates to calculate each instalment accurately. If your quarterly income varies too much, you can recalculate your liability and adjust the next instalment.

How to Pay Advance Tax Online?

Follow these steps to complete the advance payment of tax in income tax department’s online portal:

1. Go to the official e-filing portal of the Income Tax Department.
2. Navigate to the ‘e-Pay Tax’ option. This option can be found in the dropdown menu under Quick Links, or alternatively, you can get to it through the search bar.
3. Here, you’ll need to enter your PAN or TAN details, along with your mobile number. Press continue after you’ve done so.
4. You’ll be prompted to input the OTP you received. Enter it and press continue.
5. On the next page, you’ll encounter a few options. Select the ‘Income Tax’ tab and proceed.
6. Select the applicable assessment year, and in the ‘type of payment’ choose ‘Advance Tax (100)’. Click continue to proceed.
7. Fill in the tax details such as tax, surcharge, cess, interest, and others. Once done, press continue.
8. On the next page, you can select the mode of payment from options like net banking, NEFT, RTGS, debit card etc. Press continue.
9. You’ll be taken to a summary page where you can verify the details you’ve entered. Check them thoroughly and edit details if required. Once you’ve verified the information, press ‘Pay Now’.
10. Once you successfully complete the payment, you’ll see an acknowledgement appear on the next screen. Save a copy of this tax receipt, as you’ll need to enter the BSR code and challan number when filing your tax return later.

Advance Tax Late Payment and Interest

Failure to comply with advance tax rules can lead to penalties under Sections 234B and 234C of the Income Tax Act.

Penalties under Section 234C: For delay in making advance tax payments

If a taxpayer fails to pay an advance tax instalment on time, interest is levied at 1% per month. The interest is calculated from the due date of the missed instalment until the date of payment.

• 15% of total tax liability by 15th June: 1% interest per month for 3 months
• 45% by 15th September: 1% interest per month for 3 months
• 75% by 15th December: 1% interest per month for 3 months
• 100% by 15th March: 1% interest for 1 month

Penalties under Section 234B: For non-payment of advance tax

According to advance tax provisions, taxpayers must pay at least 90% of the total tax before 31st March of the financial year. If advance tax is not paid or less than 90% of the total liability is cleared by then, interest is charged at 1% per month on the unpaid tax amount.

Advance Tax Payment for Special Cases

There are certain advance tax provisions in place for special cases.

1. Senior citizen exemption: Individuals aged 60 and over are not required to pay advance tax unless they earn income from a business or profession. They can simply file their income tax returns before the usual deadline.
2. Presumptive taxation scheme: As discussed previously, taxpayers who have opted for the presumptive taxation scheme (Professionals under Section 44AD and businesses under Section 44ADA) can pay advance tax in a single instalment before 15th March.
3. If your TDS deducted in a financial year exceeds your expected tax liability, you don’t need to pay advance tax.

Conclusion

Advance tax is a kind of income tax which is paid as one earns. If the tax liability exceeds Rs. 10,000 in a financial year (after deducting TDS and relief), they are required to pay advance tax in 4 instalments as per the due dates set by the Income Tax Department. There are specific advance tax provisions which allow taxpayers earning professional or business income to opt for the presumptive taxation scheme, under which they can pay the advance tax by the 15th or 31st of March in a single instalment.

The income tax India advance tax rules under Sections 234C and 234B state that delay or non-payment of advance tax can lead to penalties. Investors should correctly assess their tax liability for the year and make adjustments every quarter to avoid interest charges.