What is Advance Tax?

Advance tax payment is a system designed for taxpayers to pay their tax liability as they earn income rather than waiting until the end of the financial year. This approach ensures that taxes are collected in instalments throughout the year. Advance tax is crucial because it helps prevent the last-minute burden of paying a large sum. For individuals earning income outside regular employment, such as through investments or business, being aware of the advance tax definition and the method to calculate it plays a vital role in staying financially organised.

How is Advance Tax Calculated?

Advance tax is calculated based on your estimated total income for the financial year. Once you estimate your income, you compute the tax liability on that income. From this, you can deduct TDS (Tax Deducted at Source), if applicable. The balance amount that remains after deduction is what you need to pay as advance tax. For example, if your total income for the year is ₹10,00,000 and your total tax liability is ₹1,00,000, but ₹30,000 has already been deducted as TDS, you will be required to pay ₹70,000 as advance tax.

Who is liable to pay Advance Tax?

If your tax liability exceeds ₹10,000 in a financial year, you are liable to pay advance tax. This generally applies to individuals who have sources of income other than salary, such as freelance work, rent, or capital gains from stocks. Salaried individuals are usually exempt because their employers deduct taxes at the source. However, if they have additional income streams, they too are required to make an advance tax payment.

What are Due Dates for Payment of Advance Tax?

Advance tax payments are divided into four instalments. The deadlines for these instalments are fixed throughout the financial year. The first instalment is due on June 15th, when 15% of the total advance tax liability should be paid. By September 15th, 45% of the tax should be paid. The third instalment, due on December 15th, requires 75% of the total tax to be cleared, and the final 100% must be settled by March 15th. Missing these deadlines can result in penalties and interest.

How to Calculate Advance Tax?

So how can you know how much advance tax to pay? Calculating advance payment of tax requires you to estimate your income from all sources, including business profits, interest income, and capital gains. After estimating your total income, you calculate your tax liability using the applicable income tax slabs. Then, you deduct any TDS that may already have been paid and pay the balance as advance tax. It’s important to review your income periodically throughout the year to ensure you're paying the correct amount for each instalment.

How to Pay Advance Tax Online?

Paying advance tax online is straightforward and can be done via the official Income Tax Department's website.

• Log into your account and select the 'Advance Tax Payment' option under the tax payment section.
• After filling in the required details under the Advance Tax Section such as PAN and the assessment year, you can proceed to pay through internet banking or using debit or credit cards.
• Once the payment is made, a receipt is generated, which should be kept for future reference.

Which forms are required in advance tax?

The primary form used for advance tax payments is Challan 280. This form is available on the Income Tax Department's e-filing website. You will need to select the appropriate section for advance tax payment under this form. Additionally, you must enter details such as the amount being paid, your PAN number, and the assessment year. It is essential to fill in the correct details to ensure that your payment is processed without issues.

What are the important dates in advance tax?

Several important dates are associated with income tax’s advance tax payments. As mentioned earlier, the due dates for advance tax instalments are June 15th, September 15th, December 15th, and March 15th. For individuals who miss these deadlines, there is a provision to pay interest under sections 234B and 234C of the Income Tax Act. To avoid such penalties, it is crucial to mark these dates and ensure timely payments.

Benefits of Paying Advance Tax

Paying advance tax brings several benefits, primarily reducing the burden of paying a lump sum amount at the end of the financial year. It also helps you avoid penalties and interest that may accrue if taxes are not paid on time.

Moreover, making regular advance tax payments provides an opportunity to manage cash flow efficiently, especially for those with fluctuating incomes, like freelancers or business owners. Additionally, it reflects good financial discipline, helping you stay on top of your tax obligations.

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Advance Tax FAQs

Do the NRIs need to pay advance tax?

Yes, Non-Resident Indians (NRIs) are also required to pay advance tax if their income in India exceeds the taxable limit. For instance, if an NRI is earning rental income from property in India or capital gains from investments, they are liable to pay advance tax, just like resident individuals.

Who is liable to pay advance tax?

Any individual whose total tax liability exceeds ₹10,000 is required to pay advance tax. This includes salaried individuals with additional income, self-employed professionals, and businesses. For those receiving income where TDS is not applicable, the advance tax system ensures that taxes are paid throughout the year.

Why do I have to make an advance tax payment?

The advance tax payment is mandated by the Income Tax Act to ensure that taxpayers spread their tax liability over the year. It also helps the government manage its cash flow. For the taxpayer, it prevents the stress of arranging a large amount at the year’s end and avoids penalties for late payments.

Is advance tax mandatory?

Yes, advance tax is mandatory for individuals whose estimated tax liability exceeds ₹10,000. Failure to comply with the advance tax payment schedule can result in penalties under sections 234B and 234C. It is therefore essential to pay in the prescribed instalments to avoid any legal or financial consequences.

What happens if we don't pay advance tax?

If you fail to pay advance tax, you will be charged interest under sections 234B and 234C of the Income Tax Act. These penalties can accumulate over time, increasing the overall tax liability. Additionally, delayed payments could disrupt your financial planning, so it is always wise to pay on time.