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Advance Tax

As per the Income Tax Act, every assessee who has an estimated income tax liability of INR 10,000 or more in a financial year has to pay the estimated tax in advance.

In this article, you will find answers to these questions:

What Is Advance Tax?

Advance Tax is the tax paid in advance during the Financial Year (FY) on the income earned/to be earned in that year. This reduces the burden of the taxpayer who would otherwise have to pay a lump sum amount as tax at the end of the year. Advance Tax is also known as pay as you earn tax.

Who Should Pay Advance Tax?

Every assessee should pay advance tax if the amount of income tax payable by him/her/them during the FY is estimated to be INR 10,000 or more. However, if an assessee is an individual resident in India and:

  • Does not have any income chargeable under the head ‘Profits and gains of business or profession’ and
  • Is of the age of 60 years or more at any time during the previous year,

the advance tax provisions will not be applicable. In other words, a resident senior citizen (i.e., an individual aged 60 years or above) not having any income from business or profession is not liable to pay advance tax.

Note: A taxpayer opting for the presumptive taxation scheme under section 44AD/44ADA is liable to pay advance tax.

How To Calculate Advance Tax?

Step 1: Estimate the income earned/to be earned in the financial year.

Step 2: Calculate the income-tax payable on the estimated income based on the income tax rates applicable in the relevant financial year.

Step 3: Deduct TDS/TCS as applicable from the calculated income tax.

The balance amount here is the total advance tax payable.

What Are The Due Dates For The Payment Of Advance Tax?

Advance tax is usually paid in instalments. The due dates for these payments are:

Instalment Due date Advance tax payable
1st Instalment On or before 15th June Minimum 15% of advance tax
2nd Instalment On or before 15th September Minimum 45% of advance tax as reduced by the amount, if any, paid in the previous instalment
3rd Instalment On or before 15th December Minimum 75% of advance tax as reduced by the amount, if any, paid in the previous instalments
4th Instalment On or before 15th March Minimum 100% of advance tax as reduced by the amount, if any, paid in the previous instalments

However, taxpayers who have opted for the presumptive taxation scheme under section 44AD/44ADA can skip the first three instalments and pay 100% of the advance by the 15th of March of the relevant financial year.

Note 1: Any advance tax paid on or before 31st March of the relevant financial year will be treated as advance tax.

Note 2: If the last day for payment of any instalment of advance tax is a bank holiday, then, the taxpayer should pay the advance tax on the immediately following working day.

How To Pay Advance Tax?

As per Income Tax Rules, companies and taxpayers who have to get their books of accounts audited should pay Advance Tax through the electronic payment mode using the internet banking facility of the authorised banks.

Other taxpayers can pay advance tax either electronically or by depositing challan 280 at the receiving bank.

What Is The Interest Payable When Advance Tax Is Not Paid?

Interest for default in payment of advance tax is charged under section 234B of the Income Tax Act at a simple interest of 1% per month or part of a month. This interest is levied when:

  • The taxpayer has not paid advance tax though he/she is liable to pay it or
  • The advance tax paid by the taxpayer is less than 90% of the assessed tax.

Note: Interest under section 234B is levied on the amount of advance tax not paid. This interest is calculated from the first day of the Assessment Year (AY), i.e., from 1st April of the relevant AY,  till the date of payment of self-assessment tax.

Interest for default in payment of advance tax instalment(s) is covered under section 234C of the Income Tax Act at a simple interest of 1% per month or part of a month. The interest applicable for each instalment is as follows:

Instalment Advance tax paid Interest payable Calculation
1st Instalment On or before 15th June is less than 15% 1% simple interest for 3 months 15% of Advance Tax calculated – Tax already deposited before 15th June
2nd Instalment On or before 15th September is less than 45% 1% simple interest for 3 months 45% of Advance Tax calculated – Tax already deposited before 15th September
3rd Instalment On or before 15th December is less than 75% 1% simple interest for 3 months 75% of Advance Tax calculated – Tax already deposited before 15th December
4th Instalment On or before 15th March is less than 100% 1% simple interest for 1 month 100% of Advance Tax calculated – Tax already deposited before 15th March

Note: In case the shortfall in Advance Tax paid is due to the underestimation of capital gains or speculative income (lottery income, gambling income, etc.), interest under section 234C will not be charged.

Points To Remember

  • Advance tax paid will be reflected on the assessee’s Form 26AS within 3-4 working days.
  • TDS/TCS credit available to an assessee can be deducted from the estimated tax calculated. Advance tax is net of TDS/TCS.
  • Assessee can revise the estimated income while computing tax liability.