Advance tax under income tax means paying it in full in advance, rather than paying it in a lump sum at the end of the year. The same is true for the expression Pay as you Earn. These funds are used for national development, infrastructure reform, and social improvement and help shape the country’s economy.
What is advance tax in income tax?
Advance tax is the amount of income tax payable well in advance, instead of being paid in a lump sum at the end of the year, as per the deadlines set by the Income Tax Department. Input tax, also known as income tax, is intended to be paid in the same year that the income was earned.
Who is liable to pay advance tax?
According to Section 207, taxable persons who are freelancers such as employees, freelancers, doctors, lawyers, accountants, architects, etc., earn more than Rs 10,000 and are subject to taxation. For employees, employers deduct tax at source on salary income.
Therefore, advance tax should only be paid if, in addition to your salary, you also earn other income that is not reported to your employer. This could be capital gains, homeownership income, dividend income, interest income, etc.
Even NRIs (Non-Resident Indians) have income in India and have more than Rs 10,000 in taxes due.
Which persons are not liable to pay advance tax?
Every person whose estimated tax payment for the year is Rs. 10,000 or more is liable to pay advance tax.
A resident senior citizen (i.e., an individual of the age of 60 years or
above during the relevant financial year) with no business or professional income is not liable to pay advance tax.
How advance tax is calculated?
Below are four steps to help you calculate input tax.
- Estimate your total non-salary income.
- Subtract all expenses from your income, such as health insurance premiums, phone bills, and transportation costs.
- Then add any other income you receive in addition to your salary. This includes interest, rent, lottery earnings, etc. from the FD.
- If the calculated tax amount is greater than 10,000, you are liable for advance tax.
Illustration:
Vinay is a hired professional. Vinay estimates that the total annual revenue for the 2021-22 fiscal year will be Rs 40,00,000 and the expenses will be Rs 24,00,000. He deposited Rs 90,000 into his PPF account for retirement expenses. In addition, he paid Rs. 65.000 for life insurance. He also paid his Rs 28,000 for health insurance. Vinay’s professional receipts are subject to TDS. He estimates a TDS of Rs 60,000 for certain professional incomes for the fiscal year 2021-22. He also estimates interest on fixed deposits held at Rs 20,000.
Solution:
| Income Estimation for Advance Tax | Amount | Amount |
| Income Details | ||
| Gross Receipts | 40,00,000 | |
| Less: Expenses | 24,00,000 | 16,00,000 |
| Income from other Sources | ||
| Interest from Fixed Deposit | 10,000 | |
| Gross Total Income | 16,10,000 | |
| Less: Deduction under Section 80C | ||
| Contribution to PPF | 80,000 | |
| Life Insurance Premium | 50,000 | |
| 1,30,000 | ||
| Deduction Under Section 80D | 24,000 | 1,54,000 |
| Total Income | 14,56,000 | |
| Total Tax Liability | 16,40,839 | |
| Add: Health & Education Cess | 63,109 | |
| 17,03,948 | ||
| Less: TDS | 60,000 | |
| Assessed Tax | 15,80,839 |
What is advance tax penalty?
Advance tax paid is less/more than necessary for a financial year:
If the taxpayer deposits less than 90% of his total tax liability, interest is chargeable under Section 234B. An individual has to pay interest at the rate of 1% per month.
Conversely, if you have paid more advance tax than you need, you will be refunded the excess amount you paid. The Income Tax Department pays the taxpayer interest at the rate of 6% per annum if the excess amount exceeds 10% of the tax liability.
Missing the due dates for paying Advance Tax:
Failure to pay advance tax within the due date will result in penalties. Unpaid advance taxes under Section 234B are subject to a simple interest penalty of 1% per month for part of the month. If the taxpayer does not pay the full amount, interest will be charged on the shortfall. And in case of a shortfall, you will be charged three months of interest under Section 234C.
What is the benefit of paying advance tax?
Here is a list of the benefits you get when you advance tax:
- Advance tax helps reduce stress for taxpayers.
- Thanks to tax advances, taxpayers don’t have to worry about running out of money or paying taxes at the last minute.
- Speed up the tax collection process.
- Government funding increases as the government can earn interest on the amount collected.
- Those who pay taxes in advance can avoid non-payment.
- It helps businesses manage their finances well and provides an overview of income earned throughout the year.
What are the due dates for payment of advance tax?
Advance tax payable for FY 2022-23
| Due Dates | Advance Tax Payable |
| On or before 15th June | 15% |
| On or before 15th September | 45% |
| On or before 15th December | 75% |
| On or before 15th March | 100% |
Which forms are required in advance tax?
Form Challan No. ITNS 280 must be duly submitted by the deadline.
Challan No. ITNS 280 has the following requirements:
PAN Details – Make sure you are sharing the correct PAN details. Otherwise, your taxes will be in someone else’s name.
Tax Year – Please select the correct tax year as you will be paying advance tax for the following year.
Select Payment Type – This form requires the taxpayer to select a payment type as shown below.
Advance tax if the tax is paid for the same financial year on the estimated income.
It is a self-assessment tax if the tax is payable after the end of the financial year.
A Challan Identification Number (CIN) is provided upon receipt of payment. You must retain this information and use this CIN for filing your income tax return. Also, confirm that the income tax authority has received online payments made through TNS 280.
What is Refund of Advance Tax?
If the Income Tax Department discovers that you have paid more taxes required they will refund you the overpaid amount. By filing form 30 taxpayers can claim a refund. Claims must be made within one year from the last year of the assessment year.
Frequently Asked Questions (FAQ)
How often can I pay advance tax?
You can pay your advance taxes in three installments, on 15th September, 15th December, and 15th March of the financial year.
Are NRIs entitled to advance tax payments?
Yes, NRIs with income over Rs. 10,000 in India must pay advance tax.
What is the mode of payment of advance tax?
You have two options for paying your advance tax: challan or internet banking.
I forgot to pay my fourth installment on 15 March. What should I do?
If you missed the March 15th deadline for the fourth installment, you can pay by March 31st.
Can I claim a deduction under 80C while estimating income to determine my advance tax?
Yes, you can claim Section 80C deductions while estimating your income to determine your advance tax.
Wrapping Up
As an Indian citizen, you have to pay your taxes on time. This applies to rent, capital gains from stocks, fixed deposits, lottery winnings, etc. You can pay online or through certain banks.