Not many know that advance tax payments have to be made regularly, even monthly, and is mandatory for anyone who owes the government more than Rs.10,000 in taxes annually, with the exception of those who have only their salary as source of income.
What Is Advance Tax?
Any individual who owes more than Rs. 10,000 in income tax to the government in a year is liable to pay Advance Tax. Advance Tax has to be paid regularly, monthly if need be, instead of waiting to pay the entire tax liability in a lump sum at the end of the year. It is also known as “pay-as-you-earn” tax because you are paying off your tax liability as and when you get an income.
If your salary is the only income you have, then you do not need to worry about paying advance tax because the employer gives you the salary only after subtracting of Tax Deduction at Source (TDS). But if you have any other source of income such as interest from Fixed Deposits and Recurring Deposits, Capital Gains, etc. then you have to pay advance tax separately. If you are a self-employed professional, freelancer or a business entity, then the responsibility to pay advance tax at regular intervals is yours.
Senior citizens aged 60 or more, who do not operate any business, are not required to pay advance tax.
How Much Advance Tax Needs To Be Paid?
The schedule for payment of advance tax was different for individuals and companies earlier, but it was standardised in the 2016 Union Budget. The timetable for paying advance tax is as given below:
|Instalment Due Date||Amount|
|On or before June 15||At least 15% of the Advance Tax Liability|
|On or before September 15||At least 45% of the Advance Tax Liability, after reducing the amount already paid earlier|
|On or before December 15||At least 75% of the Advance Tax Liability, after reducing the amount already paid earlier|
|On or before March 15||100% of the Advance Tax Liability, after reducing the amount already paid earlier|
So if your tax liability is Rs. 30,000 after deductions and exemptions, you need to pay at least Rs. 4,500 by June 15, Rs. 9,000 by September 15 (Rs. 13,500 minus Rs. 4,500), Rs. 9,000 by December 15 (Rs. 22,500 minus Rs. 13,500), and the remaining amount of Rs. 7,500 by March 15.
You need to pay advance tax through Challan No. 280. You can do this online through the online services of NSDL-TIN, or pay the amount at the specified branches of scheduled banks such as RBI SBI, ICICI Bank, HDFC Bank, etc. Around 926 bank branches in India accept advance tax payments. You do not need to submit any documents while paying advance tax. The proofs of investment, loss, etc. have to be produced only while filing income tax returns.
How To Calculate Advance Tax?
Advance tax is not always easy to pay because sometimes you may get an income from unplanned sources. The Income Tax Act classifies income into 5 heads:
- House property
- Profits and gains of business or profession
- Capital gains
- Other sources (such as winnings from lottery, online competitions, TV shows)
To make calculation easier, follow the steps mentioned below:
- You need to calculate the income from all the sources known to you for calculation of Advance Tax.
- On this estimated income, you need to determine which income tax bracket you come under.
- After that you need to deduct the amounts invested under Chapter VI-A of the Income Tax Act – the investments under Sections 80C to 80U, for example – any loss in the previous years that you have carried forward and any other deductions and exemptions applicable to you or your company.
If this has to be presented as a formula, the advance tax payable would be:
Estimated Total Income = Income from all sources — Losses and allowances carried forward — Deductions under Chapter VI-A
Advance tax payable = Income Tax payable on estimated total income + Surcharge (if applicable) — Relief under Section 89 + 2% Education Cess + 1% Secondary and Higher Secondary Education Cess (SHEC) — Relief under Sections 90, 90A and 91 — MAT credit under Section 115JAA — TDS deducted (if any) as shown in Forms 16 or 16A.
If you make unexpected or unplanned income such as capital gains, it is possible that that amount would not have been added to the computation of your advance tax. In this case, it would be easier to compute tax on the capital gains separately and pay it in lump sum or in equal instalments over the remaining period of the assessment year.
If you end up paying more tax than is required based on your income and deductions, then you will get a refund from the I-T department with an interest of 6% on the refund amount.
Payment of Advance Tax is mandatory under Income Tax rules because that allows the government to earn revenue steadily. It also ensures that you are able to distribute your tax burden over a period of 12 months instead of in a huge amount that may prove heavy on you.