For salaried individuals in India, understanding Advance Tax is crucial for financial planning and compliance with income tax laws. While salaried employees typically have tax deducted at source (TDS), certain situations may require them to pay advance tax. This blog provides a comprehensive guide to help you understand what advance tax is, who needs to pay it, and how you can calculate and pay it efficiently.
What is Advance Tax?
Advance tax, often referred to as “pay-as-you-earn” tax, is the income tax that must be paid in advance instead of at the end of the financial year. It applies to individuals whose tax liability exceeds ₹10,000 after accounting for TDS. This ensures the government receives tax revenue throughout the year rather than waiting until the financial year ends.
Do Salaried Employees Need to Pay Advance Tax?
For most salaried employees, the employer deducts TDS from their monthly salary, covering their tax liability. However, you may need to pay advance tax if you earn income from sources other than your salary, such as:
- Rental income from property.
- Interest income from savings accounts, fixed deposits, or bonds.
- Capital gains from the sale of shares, mutual funds, or property.
- Freelancing income or side businesses.
- Other taxable income, such as winnings from lotteries or gifts.
If the tax liability on your salary and additional income after all exemptions, deductions and TDS exceeds ₹10,000 in a financial year, you are required to pay advance tax.
How to Calculate Advance Tax for salaried employees?
Step 1: Estimate Total Income
Add your salary income, which is already subject to TDS, and other sources of income (e.g., rent, interest, capital gains).
Step 2: Deduct Exemptions and Deductions
Subtract exemptions under Section 10 (e.g., HRA, LTA) and deductions under Section 80C, 80D, etc.
Step 3: Compute Tax Liability
Calculate your total tax liability using the applicable income tax slab rates.
Step 4: Subtract TDS
Deduct the TDS already deducted by your employer or banks from your total tax liability.
Step 5: Determine Advance Tax Amount
If the balance tax liability exceeds ₹10,000, it needs to be paid as advance tax.
Advance Tax Payment Due date Schedule
Advance tax for salaried employee is paid in installments based on the following schedule:
| Due Date | Minimum Tax to be Paid |
|---|---|
| 15th June | 15% of total tax liability |
| 15th September | 45% of total tax liability |
| 15th December | 75% of total tax liability |
| 15th March | 100% of total tax liability |
How to Pay Advance Tax Online?
- Visit the official Income Tax e-filing portal and login with your PAN and password.
- Click on ‘e-Pay Tax’ under e-file section.
- Select Challan 280 for advance tax payments.
- Fill in the required details, including the assessment year and tax amount.
- Complete the payment using net banking, UPI, or debit card.
- Save the receipt for future reference.
Consequences of Non payment or Short payment of Advance Tax
Failing to pay advance taxpartly or completely, or delaying its payment, can lead to monetary penalties. Below are the key consequences you should be aware of:
1. Interest Penalty Under Section 234B
If you do not pay at least 90% of your total tax liability by the end of the financial year, you are liable to pay interest under Section 234B. Here’s how it works:
- Rate of Interest: 1% per month (or part of the month) on the unpaid tax amount.
- Calculation Period: From April 1 of the assessment year until the date of tax payment.
2. Interest Penalty Under Section 234C
If you fail to pay advance tax by the prescribed due dates or pay less than the required amount, you are charged interest under Section 234C.
- Rate of Interest: 1% per month for a delay in any installment.
- Calculation: Interest is calculated on the shortfall of the advance tax payment for each due date.
Difference between section 234B and 234C
The difference between Section 234B and Section 234C lies in the type of default they address and how interest penalties are calculated. Both sections pertain to the Income Tax Act of India and deal with interest penalties on unpaid or delayed advance tax payments, but they are applicable in different situations.
Here’s a detailed comparison:
| Aspect | Section 234B | Section 234C |
|---|---|---|
| Type of Default | Failure to pay 90% or more of total tax liability by the end of the financial year. | Delay in paying advance tax installments by their respective due dates. |
| When Applicable | If advance tax paid (including TDS) is less than 90% of total tax liability by March 31 of the financial year. | If you fail to pay the required percentage of advance tax by the quarterly due dates. |
| Rate of Interest | 1% per month (or part of a month) on the unpaid tax amount. | 1% per month on the shortfall in advance tax for each missed installment. |
| Period of Calculation | From April 1 of the assessment year until the date of full tax payment. | From the due date of each installment until the date of actual payment. |
| Base Amount | Entire unpaid tax liability. | The shortfall in the advance tax for each due date. |
| Objective | Penalizes insufficient advance tax payment by the financial year-end. | Penalizes delay in quarterly advance tax payments. |
Conclusion
While salaried employees may rely on TDS for their primary tax obligations, understanding advance tax is vital if you have additional income sources. Timely payment of advance tax not only helps you stay compliant but also minimizes the risk of penalties. Use the information in this guide to calculate and pay your advance tax with ease.
For expert assistance in managing your taxes, consult a trusted Chartered Accountant (CA) like us to ensure accurate computation and compliance.
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