Advance Tax: Who Should Pay & How to Calculate It?

Introduction

Taxes play a crucial role in shaping a nation’s economy. One of the essential components of tax compliance is advance tax. Many taxpayers are unaware of what it is, who is liable to pay it, and how to calculate it correctly. In this blog, we will break down everything you need to know about this tax, its applicability, and methods to calculate it effectively.

What is Advance Tax?

Advance tax, also known as ‘pay-as-you-earn’ tax, refers to the income tax that is paid in advance rather than in a lump sum at the end of the financial year. It applies to individuals, businesses, and professionals whose tax liability exceeds a specified limit. The primary objective of this tax is to ensure a steady inflow of revenue for the government and to distribute tax payments over the financial year, reducing the burden of paying a large sum at once.

Who Should Pay Advance Tax?

This tax is applicable to various categories of taxpayers. Below are the key groups required to pay it:

1. Salaried Individuals with Additional Income: If a salaried employee earns income from sources such as rental property, capital gains, or interest that results in a total tax liability exceeding the threshold, they must pay it.

2. Self-Employed Professionals: Freelancers, consultants, doctors, lawyers, and other self-employed individuals who earn above the threshold need to pay it.

3. Business Owners: Any business generating taxable income above the specified limit must pay it. This applies to proprietorships, partnerships, and corporations.

4. Companies and Corporations: Large and small corporations alike must pay it based on their income estimation.

5. Taxpayers with Capital Gains: If an individual earns substantial profits from the sale of property, shares, or other investments, they need to pay tax on the gains.

How to Calculate Advance Tax?

To ensure accurate tax payments, it is essential to calculate it properly. The following steps outline the calculation method:

Step 1: Estimate Total Income

Calculate your estimated income from all sources, including salary, business profits, capital gains, interest income, rental income, and any other earnings.

Step 2: Deduct Eligible Expenses & Exemptions

Subtract all applicable deductions and exemptions allowed under the tax laws. These may include deductions under Section 80C, 80D, and other applicable provisions.

Step 3: Compute Taxable Income

Once deductions are applied, determine your taxable income. This will serve as the basis for tax computation.

Step 4: Apply the Income Tax Slab Rates

Apply the current income tax slab rates to compute the total tax liability for the year.

Step 5: Deduct TDS (Tax Deducted at Source)

If any tax has already been deducted at source (TDS) by your employer, client, or bank, subtract that amount from your total tax liability.

Step 6: Divide Tax into Installments

The remaining tax liability after deducting TDS is payable in four installments:

• 15% of total tax liability by June 15

• 45% of total tax liability by September 15

• 75% of total tax liability by December 15

• 100% of total tax liability by March 15

If it is not paid within these deadlines, interest penalties under Sections 234B and 234C may be levied.

Benefits of Paying Advance Tax

There are several advantages to paying this tax on time:

1. Avoid Interest & Penalties: Timely payments help taxpayers avoid interest penalties for late payments.

2. Ease of Financial Planning: Instead of paying a lump sum at the end of the year, payments are broken into manageable installments.

3. Better Cash Flow Management: For businesses and self-employed professionals, timely payments help in managing cash flow more efficiently.

4. Compliance with Tax Laws: Ensures compliance and avoids unnecessary legal troubles.

Consequences of Non-Payment or Late Payment of Advance Tax

Failing to pay this tax or making late payments can lead to several consequences:

• Interest Penalties: As per Section 234B, interest is charged at 1% per month if the total paid is less than 90% of the total tax liability.

• Section 234C Interest: If any installment is not paid on time, interest at 1% per month is charged until payment is made.

• Legal Action: In extreme cases, prolonged tax default can lead to legal action by tax authorities.

How to Pay Advance Tax Online?

Paying this tax has become convenient with online options available. Follow these steps to pay online:

1. Visit the official income tax e-filing portal or authorized bank websites.

2. Choose the Challan 280 option for payment.

3. Enter the necessary details such as PAN, assessment year, and tax amount.

4. Select the payment method (net banking, debit card, UPI, etc.).

5. Make the payment and download the receipt for future reference.

Frequently Asked Questions (FAQs)

1. What happens if I pay more tax than required?

• If you pay excess tax, you can claim a refund by filing your income tax return. The tax department may also provide interest on the excess amount.

2. Can senior citizens be exempt from advance tax?

• Yes, as per the Income Tax Act, senior citizens who do not have income from business or profession are exempt from paying this tax.

3. What should I do if I miss an installment?

• If you miss an installment, pay the outstanding amount as soon as possible to minimize interest penalties.

4. Is advance tax applicable to NRIs?

• Yes, Non-Resident Indians (NRIs) earning income in India are liable to pay if their tax liability exceeds the prescribed limit.

Conclusion

Advance tax is an essential aspect of tax compliance that ensures a smooth and hassle-free tax payment process. Understanding who should pay it, how to calculate it, and making timely payments can save you from penalties and interest charges. By following the right steps and using online payment facilities, taxpayers can efficiently manage their tax obligations and ensure legal compliance.

Staying informed about tax rules and deadlines will help you avoid unnecessary financial stress. If you are unsure about your tax liability, consult a tax professional to guide you through the process.