What is Advance Tax?

Advance tax, also known as ‘pay-as-you-earn’ tax, is a form of income tax in which the taxpayer pays their dues in instalments throughout the year, instead of paying a lump sum at the end.

This approach helps spread the tax burden and ensure timely payments. The income tax advance tax system is designed to minimise the risk of default and maintain a steady revenue stream for the government.

In India, advance tax applicability is determined by the Income Tax Act, 1961. Taxpayers, including salaried individuals, freelancers and businesses, are required to pay advance tax if their total tax liability exceeds ₹10,000 in a financial year. The tax must be paid in specified instalments, with due dates outlined by the Income Tax Department.

Adhering to these regulations is essential for avoiding penalties and interest charges for late payments. It ensures compliance with advance tax liability while maintaining good financial health.

Estimate Your Total Income:** Include all income sources such as salary, business or professional income, rental income, capital gains and interest or dividends.

Subtract Deductions and Exemptions: Deduct eligible amounts under Sections 80C for investments, 80D for health insurance tax benefit, HRA and standard deductions to calculate taxable income.

Calculate Tax Liability: Use the applicable tax slab rates for the financial year to determine the total tax liability.

Deduct Tax Credits: Subtract TDS, TCS and any other rebates from the tax liability.

Determine Advance Tax: The remaining amount after all deductions and credits is the advance tax payable for the year.

-How to Calculate Tax Liability

Once you have your taxable income, calculate your tax liability based on the applicable income tax slab rates for the financial year.

Taxable Income Slab for FY 2024-25 (AY 2025-26)

For individuals and HUFs (Hindu Undivided Families), the slab rates for FY 2023-24 (AY 2024-25) are as follows:**

Note:** These are general slab rates. Different slabs apply to senior citizens (above 60 years) and super senior citizens (above 80 years).

-Due Dates and Payment Schedule of Advance Tax

Due dates for advance tax liability for both individual taxpayers and corporates for the financial year 2024 - 2025 are mentioned below:**

Better Financial Planning

Paying advance tax allows individuals and businesses to spread their tax liability across the year instead of paying a lump sum at the end. This helps in managing cash flow effectively and reduces financial stress.

Avoidance of Penalties

Timely payment of advance tax helps taxpayers avoid interest and penalties that accrue on unpaid taxes. This not only saves money but also ensures compliance with the tax laws and enhances a good standing with tax authorities.

Ensures Legal Compliance

Advance tax is a legal requirement for those whose estimated tax liability exceeds ₹10,000 in a financial year. Meeting these obligations helps taxpayers stay compliant and avoid legal complications or audits from the Income Tax Department.

Predictable Revenue for the Government

For the government, advance tax payments provide a steady stream of revenue throughout the year. This regular inflow of funds is essential for maintaining fiscal stability and funding various public services and developmental projects.

Encourages Financial Discipline

Regular advance tax payments encourage taxpayers to maintain accurate financial records and to be mindful of their earnings and expenditures. This discipline can lead to better financial management and planning for future tax obligations.

Reduced Year-End Burden

By paying income tax advance tax, taxpayers can avoid the burden of a large tax payment at the end of the financial year. This reduces the financial strain and allows for smoother financial operations, especially for businesses and self-employed individuals with variable incomes.

The forms and procedures for paying advance tax in India vary depending on whether the taxpayer is an individual, a business, or a company.

**Challan 280 (ITNS 280) **

Challan No ITNS 280 is the primary form used for making advance tax payments by individuals, HUFs (Hindu Undivided Families), companies and other entities to pay advance tax, self-assessment tax, regular assessment tax and tax on distributed income.

**Where to Get Challan 280 (ITNS 280) **

The form is available on the Income Tax Department's official website.

**Details Required for Advance Tax Payment **

The taxpayer must provide their PAN (Permanent Account Number), assessment year and other relevant details, such as the type of payment, such as Advance Tax, Self-Assessment Tax or Regular Assessment tax.

**Modes of Payment for Advance Tax **

Taxpayers can pay their advance tax online through the e-filing portal of the Income Tax Department of India.

-Visit e-Filing Portal: Visit the e-Filing Portal of the Income Tax Department of India.

-Go to Quick Links: Locate Quick Links on the left hand side of the page.

-Locate e-Pay Tax: Scroll down till the end to locate e-Pay tax and click on it.

-New Page will Open: You will be redirected to a new page.

-Enter PAN Details: Enter your PAN details and re-enter it to confirm it.

-Enter Mobile Number: Enter your mobile number and click on ‘Continue’.

-Enter OTP: Enter the OTP you will receive on your mobile and click on continue.

-Review PAN and Name: A page with your PAN and name will appear. Click on continue.

-Open Income Tax: A new page will open. Click on Income Tax.

-Select Assessment Year: Now select the assessment year from the dropdown and type of payment.

-Enter Tax Details: Enter all your tax details here and click on continue.

-Select Payment Option: Select the payment method and the corresponding bank and click on continue.

-Pay Now: Review all the details and click on ‘Pay Now.’

-Edit Details (if required): You may also edit these details if required and click on ‘Pay Now.’

-Get Receipt: After completing the payment, you will receive an acknowledgement.

Interest on the late payment of advance tax is levied under Sections 234B and 234C of the Income Tax Act.

Section 234B: If a taxpayer fails to pay at least 90% of the total tax liability by the end of the financial year, an interest rate of 1% per month or part of the month is charged on the unpaid amount from April 1st of the assessment year until the date of payment.

Section 234C: This section applies when the taxpayer does not pay the prescribed percentage of advance tax by the due dates. Interest at 1% per month is charged for a period of three months on the shortfall for each instalment.

Paying advance tax on time is necessary to avoid these interest charges, which can significantly increase the total tax liability.

Any individual or entity with an estimated tax liability of more than ₹10,000 in a financial year is required to pay advance tax. This rule applies across different categories of taxpayers.

Salaried Individuals with Non-Salary Income

Although salary income is usually subject to tax deduction at source (TDS) by employers, salaried individuals with additional income such as interest, capital gains or rental income must comply with advance tax rules. If their total tax liability, after considering TDS, exceeds ₹10,000, they need to pay advance tax.

Professionals and Freelancers

Self-employed professionals like doctors, lawyers, architects and freelancers who receive income from self-employment or contractual work are required to pay advance tax. They fall under the presumptive income scheme outlined in Section 44ADA of the Income Tax Act. They must calculate their income and follow the advance tax rates to determine their liability.

Businesses

All types of businesses, including sole proprietorships, partnerships and companies, are required to pay advance tax if their estimated tax liability exceeds the specified threshold. This ensures they remain compliant with tax laws and avoid penalties.

Individuals with Capital Gains

Taxpayers who earn significant capital gains from the sale of assets such as property or stocks must pay advance tax. Since capital gains can increase tax liability, individuals must calculate and pay the applicable advance tax to avoid interest charges and penalties.

Senior citizens (any individual above the age of 60) who do not earn a business income or work in a profession are exempt from paying advance tax. However, if they earn a business income, they must adhere to advance tax applicability and make timely payments.

Miscalculating Taxable Income

One of the most common mistakes is miscalculating your taxable income. This can happen because you do not include all sources of income or fail to consider deductions and exemptions properly.

Make sure to include all earnings, such as salary, rental income, capital gains and any other income sources. Keep accurate records of all your income sources and calculate your advance tax liability accordingly.

Underestimating Annual Income

A common mistake is underestimating your annual income, which may lead to a lower calculation of income tax advance tax. This underestimation can cause a shortfall in advance tax liability, which may result in interest and penalties. It is important to accurately project all income sources to ensure you meet your advance tax obligations.

Ignoring Non-Salary Income

Many taxpayers focus only on their salary income and neglect other sources like interest, dividends, rental income and capital gains. Under advance tax applicability, all forms of income must be considered. Ignoring these can result in underpayment of taxes and potential penalties.

Incorrect Application of Advance Tax Rates

Misapplying the advance tax rates or not adhering to the correct slabs can lead to incorrect tax payments. It is essential to understand the advance tax provisions and apply the correct rates based on your income level and type.

Failure to Adjust for Previous Tax Payments

Taxpayers sometimes forget to adjust for TDS or previous advance tax payments when calculating their current advance tax liability. This oversight can lead to overpayment or underpayment, which may affect the cash flow and potentially result in penalties.

Not Keeping Track of Payment Deadlines

Missing the quarterly deadlines for advance tax payments can lead to interest charges under advance tax provisions. To avoid this, taxpayers should mark these dates on their calendars and set reminders to ensure timely payments.

Relying Solely on Estimates

Some taxpayers rely too heavily on rough estimates for their income and tax liability. Without regular monitoring and adjustment based on actual income and expenses, they risk inaccurate advance tax payments. Reviewing and adjusting your estimates can help ensure compliance with advance tax rules.

Regular Income Review: Review all income sources periodically to estimate taxable income accurately and adjust advance tax payments as needed.

Use of Tax Software and Tools: Utilise tax software and tools for automated calculations, reminders for due dates and easier filing.

Consulting a Tax Professional: Seek guidance from a tax professional for personalised advice on deductions, credits and exemptions. They can also help you know about any changes in tax laws.

Set Up Reminders: Use calendar alerts to remind you of advance tax payment deadlines to avoid penalties for late payments.

Maintain Accurate Records: Keep detailed records of all income, deductions and previous tax payments to ensure accurate calculations and compliance with tax regulations.

Understanding and managing advance tax is necessary for all taxpayers to ensure compliance with tax laws and avoid penalties. By paying your taxes in instalments throughout the year, you can spread out your financial burden, maintain better cash flow and ultimately reduce stress and enhance financial planning.

Accurate estimation of income, regular monitoring of tax payments and keeping up with due dates are key to efficient advance tax management. This proactive approach not only helps in staying compliant but also contributes to overall financial stability.

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