Advance tax. If you’re living in India and fall into certain income categories, you’ve probably heard the term tossed around. But what exactly is it? Who’s responsible for paying it? And why is it so important for your financial health?
In this blog, we’ll break down everything you need to know about advance tax payments in India, how to calculate them, and why keeping up with them matters. Whether you’re a salaried employee, freelancer, or business owner, this guide will help you avoid penalties and stay on top of your tax obligations.
What Is Advance Tax?
Advance tax, also known as the “pay-as-you-earn” tax, is a system where individuals or businesses have to pay their taxes in installments throughout the year, rather than in one lump sum at the end of the financial year. In simple terms, it means paying tax in advance on income you expect to earn, rather than waiting until the end of the year.
The idea is to make tax collection smoother, spread out payments for taxpayers, and avoid a large tax bill all at once. But here’s the catch: if you don’t pay advance tax and you’re supposed to, the Indian tax authorities may slap on penalties and interest charges. No one wants that!
Who Needs to Pay Advance Tax in India?
Not every taxpayer is required to pay advance tax. Here’s a quick breakdown of who needs to pay:
- Salaried Employees with Additional Income: If you have only salary income and TDS covers your tax liability, you may not need to pay advance tax. However, if you earn additional income from rent, interest, or capital gains, you may be liable to pay advance tax.
- Sole Proprietors and Business Owners: Business owners and sole proprietors, who generally do not have TDS deducted from their income, must estimate their income and pay advance tax.
- Presumptive Taxation (Section 44AD): For small business owners opting for presumptive taxation under Section 44AD, only one advance tax installment is required. You need to pay 100% of your tax liability by March 15 of the financial year.
- Other Income Sources: Income from capital gains, investments, or any income source without TDS deductions can also make you liable for advance tax.
Why is Advance Tax Important?
Paying advance tax on time can save you from interest charges, penalties, and potential legal trouble. Here’s why staying on top of your advance tax payments is essential:
- Avoiding Penalties: The Income Tax Department imposes interest on delayed or missed advance tax payments. Sections 234B and 234C lay out these penalties, though you won’t be charged if 90% of your total tax liability is paid by March 31.
- Smoother Cash Flow: Paying tax in installments throughout the year helps you manage your cash flow more efficiently, rather than facing a massive bill at the end.
- Compliance: Fulfilling your advance tax obligations keeps you compliant with Indian tax laws and avoids unnecessary scrutiny from the tax authorities.
How to Calculate Advance Tax?
Calculating advance tax may seem overwhelming, but following a structured approach can simplify things. Let’s walk through the steps.
1. Estimate Your Total Income
To begin, estimate your total annual income. For business owners, this includes:
- Revenue from business activities
- Any additional income (like rent, interest, or investment income)
2. Subtract Allowable Deductions
If you’re a sole proprietor, you’re eligible for common deductions under Section 80C (for investments in PPF, ELSS, etc.), Section 80D (health insurance premiums), and NPS (National Pension System) contributions. These deductions can help reduce your taxable income.
Note: For other businesses, these deductions generally don’t apply.
3. Calculate Profit (Revenue – Expenses)
Once you have your total income, subtract all business-related expenses to determine your profit. This includes expenses for salaries, rent, utilities, supplies, and any other legitimate business costs. Your profit, after deductions, forms your taxable income.
4. Apply the Tax Slabs
Now, apply the relevant income tax slabs to your taxable income. Here are the tax slabs for FY 2023-24 under the old regime for individuals under 60 years of age:
- Income up to ₹2.5 lakh – Nil
- Income between ₹2.5 lakh and ₹5 lakh – 5%
- Income between ₹5 lakh and ₹10 lakh – 20%
- Income above ₹10 lakh – 30%
For the new tax regime, different slab rates apply, so choose the one that best fits your needs.
5. Subtract TDS (Tax Deducted at Source)
If any TDS has been deducted (e.g., from your interest income), subtract this amount from your total tax liability. For many business owners, TDS deductions may not cover the entire liability, so this step is especially crucial.
6. Determine Your Advance Tax Installments
If your tax liability after TDS exceeds ₹10,000, you must pay advance tax. Here’s the breakdown of advance tax installments:
- On or before June 15 – 15% of total tax liability
- On or before September 15 – 45% of total tax liability
- On or before December 15 – 75% of total tax liability
- On or before March 15 – 100% of total tax liability
Important: For those opting for the presumptive taxation scheme (Section 44AD), only a single installment of 100% of your tax liability is required by March 15, 2024.
Example of Advance Tax Calculation
Example of Advance Tax Calculation for a Business Owner
Let’s walk through a hypothetical example to make things clearer.
Suppose Raj is a sole proprietor running a digital marketing business. He expects a revenue of ₹15,00,000 in FY 2023-24, with estimated business expenses of ₹5,00,000. Raj is eligible for a deduction of ₹1,50,000 under Section 80C.
Here’s how Raj calculates his advance tax:
- Estimate total income (Revenue – Expenses):
- Revenue = ₹15,00,000
- Expenses = ₹5,00,000
- Profit = ₹15,00,000 – ₹5,00,000 = ₹10,00,000
- Subtract allowable deductions:
- Deduction under Section 80C = ₹1,50,000
- Taxable income = ₹10,00,000 – ₹1,50,000 = ₹8,50,000
- Apply tax slabs:
- Income between ₹2.5 lakh and ₹5 lakh @ 5% = ₹12,500
- Income between ₹5 lakh and ₹8.5 lakh @ 20% = ₹70,000
- Total tax = ₹82,500
- Add 4% cess = ₹3,300
- Total tax liability = ₹85,800
Raj’s total tax liability is ₹85,800. Since it exceeds ₹10,000, he’s required to pay advance tax. His payment schedule would look like this:
- June 15: 15% of ₹85,800 = ₹12,870
- September 15: 45% of ₹85,800 = ₹38,610
- December 15: 75% of ₹85,800 = ₹64,350
- March 15: 100% of ₹85,800 = ₹85,800
If Raj opts for presumptive taxation (Section 44AD), he only needs to pay 100% of his tax liability by March 15, 2024.
How to Pay Advance Tax?
Paying advance tax has never been easier, thanks to the online payment system. Here’s how you can do it:
- Visit the Income Tax Department’s website or NSDL portal.
- Select Challan No./ITNS 280 under the tax payment options.
- Enter your PAN, assessment year, and payment details.
- Choose Advance Tax as the type of payment.
- Complete the payment via net banking or debit card.
Once the payment is successful, save the receipt for your records. You’ll need it when filing your income tax return.
Consequences of Not Paying Advance Tax
Missed an advance tax payment? It’s not the end of the world, but you could face penalties.
- Interest under Section 234B: If you don’t pay at least 90% of your total tax liability by March 31, you’ll be charged interest at 1% per month from April 1 until the balance is paid.
- Interest under Section 234C: If you miss the deadlines for advance tax payments, interest is charged at 1% per month for the shortfall in each installment.
For example, if you don’t pay at least 45% of your total tax by September 15, you’ll face a penalty until the next installment is due in December.
- Penalties: Repeated failures to pay advance tax could result in additional penalties or even legal action in extreme cases.
