Advance Tax

Understanding Advance Tax

Advance tax, also known as pay-as-you-earn tax, is a system in which taxpayers are obligated to make periodic tax payments throughout the financial year, rather than a single payment at the end of the year.

Advance tax is applicable for individuals if their total tax liability for the year exceeds Rs.10,000, and for businesses, it is mandatory if their tax liability exceeds Rs. 1 lakh..

Note : Advance tax does not apply to salaried individuals without additional sources of income.

Who is Responsible for Paying Advance Tax?

For individuals: Advance tax applies if their total tax liability for the year exceeds Rs. 10,000 after considering TDS. The calculation of advance tax liability is based on the estimated income for the year, which includes salary, interest income, rental income, capital gains, and any other sources of income.

For businesses: Advance tax is required if their tax liability exceeds Rs. 1 lakh. This is applicable to all types of businesses, including sole proprietorships, partnerships, and companies.

Importance of Advance Tax for Individuals and Businesses

Taxpayers have the option to pay taxes in instalments, which allows them to better manage their cash flow and avoid the stress of a large tax payment at the end of the year.

Advance tax is beneficial for businesses as it allows them to accurately estimate and budget their tax liability. By setting aside the necessary funds, businesses can ensure they meet their tax obligations and avoid penalties and interest charges for non-compliance

Calculation and Payment of Advance Tax

To calculate advance tax, it is necessary to estimate your total income for the year and calculate the tax liability based on the applicable tax rates.

The payment of advance tax can be made in instalments throughout the year, with due dates specified for each payment. 

 - On or before 15th June: 15% of the estimated tax liability

 - On or before 15th September: 45% of the estimated tax liability

 - On or before 15th December: 75% of the estimated tax liability

 - On or before 15th March: 100% of the estimated tax liability

Consequences of Non-Compliance

Late or non-payment of advance tax can lead to penalties and interest charges. The penalty for non-payment or insufficient payment of advance tax is 1% per month on the remaining amount.

Additionally, failure to comply may impact your tax obligations for the next year. If the total amount of advance tax paid is less than 90% of the assessed tax liability, interest may be imposed under Section 234B and 234C of the Income Tax Act.