Advance tax is the “Pay as you earn”tax that has to be deposited to the Income Tax Department during the financial year. This ensures that the government can collect more uniformly throughout the year.
Latest Update as per Income Tax Department
The ITD will now send the taxpayers a mail with the details of the amount of advance tax that was paid over each quarter which would help the taxpayers to reconcile with their records for the same.
What is Advance Tax?
It is a part payment of your tax liability before the end of the financial year. Another name for it is – “pay as you earn scheme” where the income tax should be paid in the year in which the income is earned.
Union Budget 2021 Update
Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.
Who is required to Pay Advance Tax?
Every person whose tax liability for a financial year exceeds INR 10,000 has to pay it on an installment basis. Income from all the different heads is added to calculate the advance tax.
For Salaried individuals
In the case of a person having income from salary, the employer calculates the tax on salary. He is responsible to deduct tax (TDS) from your salary income and deposit the same to Government. So a salaried person does not have to pay this tax on salary income.
However, if a salaried person is having income other than salary (for eg. rental income from house property or interest from fixed deposits etc.), and if tax liability on such income exceeds INR 10,000 then the taxpayer has to pay advance tax. It is very common for salaried people to have alternate income sources and as a result, they would become liable to pay this tax.
For Presumptive Taxation
Up until FY 2015-16, assessees opting for presumptive taxation scheme were not required to pay advance tax. However, with effect from FY 2016-17 (AY 2017-18), assessees opting for presumptive taxation scheme will have to pay the tax amount in a single installment on or before 15th March. From FY 2016-17 (AY 2017-18), Freelancers and professionals can also opt for the presumptive taxation scheme and avoid the cumbersome tasks of maintaining books of account and audit.
The “Pay-as-you-earn” liability for the presumptive taxation scheme is to be calculated and paid only once before the end of the financial year. Here is how the tax should be calculated for the presumptive taxation scheme:
|Assessee type||Presumptive income||Advance tax liability|
|Business owners||8% of Turnover or Gross receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
|Professionals (Freelancers)||50% of professional fee receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
Freelancers and professionals who do not opt for the presumptive taxation scheme have to calculate and pay this tax on an installment basis. They have to estimate their annual income and calculate the tax on the same because in most cases TDS which is deducted by their customers/clients while making payments, is not enough to meet the total tax liability.
Advance Tax Calculation
- Estimate your income
Estimate your income from business or profession. Add all the incomes from ongoing projects or assignments whose fees are already determined. Also, add the incomes which are expected on the basis of ongoing interactions with clients/customers.
- Subtract eligible deductions and expenses
Deduct all eligible deductions such as tax-saving investments and payments (under the old tax regime) and expenses from your total estimated income.
You can deduct the expenses which are directly related to your business or profession. Rent, electricity, legal and professional fees, books, fuel expenses, the salary of employees, depreciation, etc. are some of the expenses which are allowed to be deducted from the income.
- Calculate the tax liability
Add incomes from remaining sources like house property, capital gains, income from other sources, etc. Then calculate the tax liability for your total income on the tax slab rates and deduct the TDS which has already been deducted from your income.
- Deduct Taxes Paid
Refer to your Form 26AS and deduct all taxes paid such as TDS deducted and deposited on your behalf, previous advance tax installments paid during the financial year.
- Assess your net tax liability
If the resulting tax liability is more than INR 10,000 then you are required to pay advance tax on an installment basis as per the schedule given below.
Advance Tax Due Dates
|Due date of installment||Advance Tax payable by Individual and Corporate Taxpayers|
|On or before 15th June||15% of the tax liability|
|On or before 15th September||45% of the tax liability|
|On or before 15th December||75% of the tax liability|
|On or before 15th March||100% of the tax liability|
In the case of salaried individuals, TDS is deducted from their salary and deposited to the government by their employer. So as far as salary income is concerned, they are not required to pay advance tax. However, for all the incomes other than salary, if the total of such incomes exceeds INR 50,000 then they will have to assess the tax liability on the same and pay tax.
Before every due date for payment of advance tax, you will have to calculate your expected annual income and determine the tax liability on the same. If your total tax liability exceeds INR 10,000 then you are liable to pay it as per the schedule given above.
There are two ways of tax payment:
– Deposit in the bank with advance tax challan or
– Online payment using a Net banking facility
As mentioned above, if you fail to pay advance tax or make a late payment of it, you will have to pay penal interest. Under section 234B, interest for default in payment of advanced tax is levied at 1% simple interest per month or part of a month