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Advance tax is the payment of income tax in advance instead of paying it all at once at the close of the financial year. It is also referred to as earn tax and is to be paid in installments according to the due dates determined by the Income Tax Department. It helps the government receive a steady stream of revenue and lightens the load of taxpayers by dividing their tax burden throughout the year.
All taxpayers who have an estimated tax liability of Rs 10,000 or more in a financial year are obligated to pay advance tax. Salaried people whose overall tax liability is more than Rs 10,000 are required to pay advance tax on their income received from employment. Freelancers, who receive income from different sources during the year, also need to pay advance tax if their overall tax liability is more than Rs 10,000 in a financial year. Companies have to pay advance tax according to the presumptive taxation arrangement of Section 44AD on the revenue realized through their firms. Senior citizens who have received a business income during a financial year are also required to make advance tax payments. Self-employed experts such as attorneys, doctors, architects, and others who are eligible under the presumptive scheme in Section 44ADA also have to make advance tax payments.
Advance tax is computed based on the estimated total income for the financial year. It begins with calculating the income tax on the estimated total income. After adjusting relief under Section 87A, the balance taxable amount is charged to surcharge if levied. Education cess and secondary and higher education cess are then added to calculate the total tax liability. Other deductions like TDS (Tax Deducted at Source) and other reliefs (other than Section 87A) are deducted to find the net advance tax liability. The estimated tax has to be paid in installments according to due dates notified by the Income Tax Department.
Advance tax is significant as it synchronizes payment of taxes with income realization instead of leaving the entire tax payable till the end of the financial year. Tax is usually paid as income is received. However under advance tax rules, the taxpayer has to estimate his income for the whole year and pay tax in installments as specified. Accurate estimation of income helps taxpayers to pay their advance tax and avoid penalties. Underestimation of income or failure to pay advance tax can result in charges of interest.
Advance tax should be paid by certain due dates prescribed by the Income Tax Department. For both individual and corporate assessments, the first installment of 15% of the entire advance tax liability is to be paid by June 15. By September 15, 45% of the overall advance tax, including the first installment, should be paid by taxpayers. 75% of the entire advance tax should be paid by December 15. The last payment, securing that 100% of the tax dues are paid, is due on or before March 15 of the financial year.
To make advance tax, taxpayers have to utilize Challan No. ITNS 280. The form has to be completed with correct information, such as the Permanent Account Number (PAN), which has to be accurate to prevent crediting the tax in another's account. The right assessment year needs to be chosen so that the tax is being distributed against the relevant financial year. Taxpayers also need to select the right category of payment in the form. When the tax is paid for the current financial year on the estimated income, it should be labeled as advance tax. If the tax is paid after the financial year's end, it comes under the self-assessment tax. After making the payment, the taxpayer is given a Challan Identification Number (CIN), which must be saved and used while filing income tax returns. Taxpayers should also check if the Income Tax Department has accepted the payment made using ITNS 280.
Delay in payment of advance tax incurs interest under Sections 234B and 234C of the Income Tax Act. Section 234B levies interest if 90% or more of the total tax due is not paid by March 31 as advance tax or TDS/TCS deductions. In this case, an interest of 1% per month is charged on the unpaid amount. Under Section 234C, interest is levied if installments of advance tax are not paid within time or are short of the percentage required. If the advance tax paid by June 15 is short of 15% of the total tax payable, interest at 1% per month is levied for three months on the deficiency. If the tax paid by September 15 is less than 45%, the same 1% interest for every month for three months is charged. The same 1% per month interest is charged for three months for shortfalls by December 15. If the advance tax paid is still less than 100% by March 15, a 1% interest charge is applied for one month on the outstanding amount.
Advance tax provides for the early collection of tax revenue while enabling taxpayers to deal with their liabilities effectively during the year. Through proper estimation of income and compliance with installment dates, taxpayers can escape interest and penalty charges and meet their tax liabilities effectively.
