Advance Tax – Know What is Advance Tax & How to Pay it

As the term suggests, advance tax means paying taxes in advance according to a set schedule before the financial year ends. As a taxpayer, you would be familiar with income tax and that it needs to be paid or recovered before the end of a fiscal year.

Understanding advance tax

The advance income tax is currently paid every quarter. This form of tax aids the government to receive tax revenue on an ongoing basis. As a taxpayer, you can make smaller payments every quarter that could be easier on your wallet, rather than making a one-time, lump sum tax payment at the end of the Financial Year - in March.

To understand what is advance tax, it merely means the payment of tax liability by a taxpaying individual before the financial year closes.

As a salaried individual, you may want to know the implications of non-payment of advance tax, how much advance tax needs to be paid, how to pay advance tax online, the income segments on which advance tax is payable and other crucial details, to avoid penalties. Being knowledgeable about taxes can help you to know the difference between the advance tax and self-assessment tax, especially when it comes to filing your taxes or understanding late payment charges.

To understand advance tax for individuals, it is imperative to know how and when you need to pay the tax and other essential factors.

Who must pay advance tax?

All taxpayers who receive taxable income from sources that are not subject to withholding tax, or where taxes are deducted at a lower rate must pay tax in advance. The Income Tax Department has laid provisions for taxpayers to pay advance tax in four easy instalments within specified due dates whose estimated tax liability for the Financial Year surpasses ₹10,000, or more, as per Section 208 of the Income-tax Act, 1961.

Senior citizens, who are 60 years and above, without an income from a business or profession, are exempt from paying advance tax.

Typically, a taxpayer's advance tax payable is decided after making an estimate of the taxpayer's total yearly income, tax payable in that regard, and as reduced by TDS and foreign tax credit. The Income Tax Department also has the authority of estimating a taxpayer's total income and advance tax payable by issuing a notice to make the payment.

The need to pay advance tax

The Income Tax Department has made it a mandatory requirement for qualified taxpayers to make advance tax payment for the benefit of the government. Advance tax facilitates the government in receiving tax income every quarter rather than at the end of the financial year. The option of paying advance tax on a quarterly basis also reduces the taxpayer's burden through the payment of smaller cash discharges.

The advance tax payable in four instalments during a specific financial year is as follows:

Types of income applicable for advance tax

All personal income is liable to tax according to the Income Tax Act. Revenue from monthly rent, interest income, capital gains on the sale of shares or assets, revenue from a profession or business and the like triggers advance tax obligation.

As a taxpayer, one must estimate the total personal income received by the individual during the financial year, ascertain the taxes payable, decrease the quantum of taxes that are reserved while remitting the balance taxes based on specific percentiles, on or before the due date of every specified quarter.

The primary area of concern for every taxpayer is to understand how to estimate one's taxable income since the revenue for the entire financial year must be calculated in advance to pay taxes.

Penalties on delaying or non-payment of Advance Tax

Here’s what you need to know regarding late payment or non-payment of advance tax.

Failing to pay advance tax or delaying paying advance tax attracts interest under Section 234B and 234C of the Income Tax Act.

1% interest is levied every month on the total amount due from April to December, and 1% for the quarter ending March.

If the advance tax is not paid on time, the simple interest of 1% per month accrues and must be paid on all pending instalments.

The Income Tax Department also levies interest if the total advance tax paid, in addition to TDS, is less than 90% of the assessed tax.

Implications of avoiding advance tax payment

With regards to salaried individuals, advance tax payable is also levied on any revenue other than the salary, as salary is subject to TDS. Non-payment, deferral of advance tax or partial payment could invite an interest of 1% per month for the first three quarters and 1% for the quarter ending March.

This could cumulate in a total of 10% of the advance tax due. In the event that the taxpayer does not pay 90 % of advance tax by March 31 of a financial year, an interest rate of 1% per month will be levied under Section 234B of the Income Tax Act until all the taxes are paid in full.

This means, if you default in making advance tax payment during the first three instalments, it could result in 3% interest on the tax payable for the quarter. In contrast, a default in paying the last instalment could result in 1% interest on the advance tax payable.

Conclusion

You can make advance tax payment off-line by filling in Challan 280 at authorised bank branches. Similarly, you can also make the payment online via the Income Tax Department's website that offers detailed instructions. Calculate your taxable income and adjust your tax payment accordingly to know your advance tax payable.

As a taxpayer, it can help to estimate your total taxable income for the entire financial year in advance. Paying taxes as per the advance tax due dates can save you from the interest levied on a non-payment or short payment of the advance tax. In addition to avoiding paying high-interest amounts, it could also help in reducing the stress of paying significant tax amounts at the time of filing your income tax returns.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.