What is Advance Tax ?

Advance tax is the income tax that is paid in advance instead of lump sum payment at the end of the financial year. It is the tax that you pay as you earn. These payments have to be made in instalments as per due dates provided by the income tax department.

Advance tax is paid by individuals who have income from other sources also beyond their regular salary. These sources can include earnings from Rent, Capital Gains, lottery Winnings, Interest from Fixed Deposits, and other similar Sources of Income.

It is also known as "pay as you earn" tax, where taxpayers make prepayments of their income tax throughout the financial year instead of paying a lump sum at year-end. It is mandated when the anticipated tax liability for the year exceeds a certain threshold ( exceeding Rs. 10,000 in a financial year), typically specified in tax regulations. This ensures a steady flow of revenue for the government and helps taxpayers manage their tax obligations effectively.

Who is liable to pay Advance Tax ?

Advance tax is typically required to be paid by individuals and entities. with an estimated tax liability of ₹ 10,000 or more in a financial year. Here are the key categories of taxpayers who should pay advance tax:

1. dividuals (including salaried employees): If your total tax liability after accounting for TDS (Tax Deducted at Source) is expected to be Rs. 10,000 or more for the financial year, you are required to pay advance tax.

2. Self-Employed and Professionals: Individuals earning income through business, freelancing, consultancy, or any profession are also liable to pay advance tax if their estimated tax liability exceeds Rs. 10,000 for the financial year.

3. Corporate Entities: All companies, including public and private limited companies, are required to pay advance tax. The due dates and percentages may vary based on the company's size, revenue, and profit.

4. Partnership Firms and LLPs: Partnership firms and Limited Liability Partnerships (LLPs) should also pay advance tax if their estimated tax liability exceeds Rs. 10,000 for the financial year.

5. Non-Resident Taxpayers: Non-resident individuals and foreign companies earning income in India are subject to advance tax requirements if their tax liability crosses the Rs. 10,000 threshold.

6. Capital Gains: Individuals earning capital gains from the sale of assets such as real estate, stocks, or other investments may need to pay advance tax if their estimated capital gains tax liability is Rs. 10,000 or more.

7. Businesses with Specified Incomes: Some businesses, such as lottery and horse racing, are required to pay advance tax on specified incomes irrespective of the Rs. 10,000 threshold.

8. Senior Citizens Senior citizens who have earned a business income in a financial year must pay advance tax.

For Example:

In the above case, since the total estimated tax liability exceeds Rs. 10,000/- but the estimated tax liability after deducting TDS is less than Rs. 10,000/-, then he/she is not liable to pay any advance tax.

Who is not liable to pay Advance Tax ?

While many taxpayers are required to pay advance tax, there are specific groups of individuals and entities who are not liable to pay advance tax. These include:

o Tax Relief for Senior Citizens:
Individuals aged 60 years or above, without income from business or profession, are exempt from paying advance tax.

o Income below Taxable Limit:
Taxpayers with total income not exceeding the taxable limit are not required to pay advance tax.

o Presumptive Taxation Scheme for Businesses:
Small businesses with an annual turnover of up to Rs. 2 crores can opt for the presumptive taxation scheme and are exempt from advance tax.

o Farmers and Agriculturists:
Income from agricultural activities is not considered for advance tax calculation, providing relief to farmers and agriculturists.

o Commission or Brokerage Income:
Individuals earning income through commission or brokerage are exempt from paying advance tax on such earnings.

o Income Covered under Section 44ADA:
Professionals with specified income covered under Section 44ADA, such as certain professionals in the fields of medicine, law, engineering, etc., are exempt from advance tax.

o Individuals with Business Income under Presumptive Taxation:
Individuals having business income covered under presumptive taxation provisions are not required to pay advance tax separately on such income.

o Capital Gains:
Taxpayers with income from capital gains are exempt from paying advance tax if they choose to pay the entire tax liability at the time of e filing income tax return.

o Salary Income:
Salaried individuals are generally not required to pay advance tax as their employers deduct tax at source (TDS) from their salary.

o Dividend Income:
Individuals receiving dividend income are not subject to advance tax on such earnings.

How Advance Tax Payment Calculated ?

Below are the steps to compute your advance tax liability:

Step 1: Estimate your total income for the financial year from the various sources including capital gains, rental income, professional income, income from fixed deposits, salary and any other sources.

Step 2: From the gross receipts, reduce various deductions under section 80C, 80D, etc.

Step 3: Compute the tax payable on the basis of the current tax slab rates.

Step 4: Subtract any Tax Deducted at Source (TDS) that has already been deducted or is expected to be deducted based on the TDS rates.

If your tax liability after deducting TDS exceeds 10,000, you must pay the advance tax.

Tax payable/Tax Refundable :-

Advance tax is the payment of tax during the financial year in 4 instalments based on the estimated income for the year to avoid lump sum tax payment at the year end. If there is a shortage/excess of tax payment after adjusting advance tax, tax deducted at source & tax collected at source, the assessee would arrive at the tax payable or tax refundable, respectively. 

Benefits of Paying Advance Tax :-

• The tax collection process speeds up.
• Defaulting tax payment, chances are reduced.
• Increase in government funds as the government receives interest on the collected amount.
• From the government's perspective, it provides a continuous flow of income throughout the year.
• Taxpayers need not worry about the shortage of money or tax payments at the last moment or at the time of ITR e filing.

Which forms are required in Advance Tax ?

To ensure compliance with tax regulations, it's crucial to properly fill out and submit Form Challan No. ITNS 280 on or before the deadlines. This form has specific preconditions that need to be met:

1. PAN Details: It's imperative to provide accurate PAN (Permanent Account Number) details to avoid any misallocation of tax payments. Using incorrect PAN details may result in the tax being credited to someone else's account.

2. Assessment Year: Selecting the correct assessment year is essential as the tax being paid is typically for the upcoming financial year. Ensure that you choose the appropriate assessment year to align with your tax liability.

3. Choosing a Payment Type: In the form, taxpayers must select the payment type based on the nature of the tax being paid:

• • Advance Tax: If the tax is being paid for the same fiscal year based on estimated income.
  • Self-Assessment Tax: If the tax is being paid after the end of the financial year to regularize the tax liability.

4. Challan Identification Number (CIN): Upon successful payment, a Challan Identification Number (CIN) will be generated. It's essential to record this number and use it when filing your income tax return. Additionally, ensure that the Income Tax Department has received the online payment made through ITNS 280 by verifying the transaction status.

If you miss advance tax payments or delay them, there is penal interest on the taxes due, under section 234C, at the rate of 1 percent per month/part of the month.

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