Advance tax – Meaning | How to pay | Due date | Penalties

What is Advance Tax? 

Advance tax, often referred to as the “pay-as-you-earn” tax, is a system where taxpayers are required to pay their taxes in installments during the financial year, rather than waiting until the year-end. It ensures that individuals and businesses contribute to the government’s revenue in real-time based on their income as it accrues.

This system applies to taxpayers whose total tax liability exceeds ₹10,000 in a financial year, and it’s an essential component of India’s income tax structure.

Legal Basis of Advance Tax

The concept of advance tax is governed by the Income Tax Act, 1961, specifically under the following provisions:

• Section 208: Mandates advance tax payment for taxpayers with a liability exceeding ₹10,000 in a financial year.
• Sections 209 and 210: Outline the method of calculating and paying advance tax.
• Sections 234B and 234C: Specify penalties for non-payment or delayed payment of advance tax.

Explanation of the “Pay-as-You-Earn” System

The advance tax system operates on the principle of “pay-as-you-earn,” requiring taxpayers to estimate and pay taxes as their income is earned or accrued during the financial year. This is achieved through quarterly installments based on estimated income and tax liability.

Key Highlights of the System:

1. Quarterly Payments
   Taxpayers pay a percentage of their estimated total tax liability at specified intervals throughout the year.

2. Flexibility for Income Variations
   Tax liability can be recalculated in subsequent quarters if income fluctuates, ensuring accurate compliance.

3. Avoidance of Financial Burden
   By spreading payments, taxpayers avoid the stress of a single large payment at year-end, making tax management easier.

Who Should Pay Advance Tax?

Advance tax is mandatory for taxpayers whose total tax liability after TDS exceeds ₹10,000 in a financial year. This includes individuals, professionals, and businesses.

Advance Tax for Individuals

1. Salaried Individuals 

   • If your employer deducts Tax Deducted at Source (TDS) from your salary, you might not need to pay advance tax on the salary portion.
   • However, if you earn income from sources like rent, interest, capital gains, or dividends, and your total tax liability exceeds ₹10,000 in a financial year, you must pay advance tax on these incomes.

2. Self-Employed Individuals and Freelancers

   • Professionals such as doctors, lawyers, consultants, and freelancers without TDS deductions on their income are required to pay advance tax.

How to Calculate Advance Tax for Individuals?

To calculate advance tax, follow these steps:

1. Estimate Total Income for the Financial Year

   • Include all income sources such as salary, rental income, business/professional income, capital gains, and other taxable earnings.

2. Subtract Eligible Deductions

   • Deduct exemptions under Sections 10 and 24 (e.g., HRA and home loan interest).
   • Deduct benefits under Chapter VI-A (e.g., Section 80C, 80D).

3. Compute Tax Liability

   • Apply the applicable income tax slab rates for the year.
   • Subtract any TDS already deducted from your income.

4. Check Advance Tax Applicability

   • If the net tax payable exceeds ₹10,000, you must pay advance tax.

Advance Tax Payment Due date Schedule for Individuals

How to Pay Advance Tax?

Paying advance tax is a straightforward process, and taxpayers can choose either online or offline methods based on their preference. Here’s a step-by-step guide:

1. Online Method: Through the Income Tax Portal

The online method is fast, secure, and convenient. Follow these steps:

1. Visit the Income Tax Portal

   • Go to the official portal: https://www.incometax.gov.in.

2. Log in with Your PAN

   • Use your Permanent Account Number (PAN) as your user ID.

3. Access the e-Pay Tax Section

   • Click on “e-Pay Tax” under the e-file section on the homepage.
   •  

4. Choose the Appropriate Challan

   • Select Challan 280 for advance tax payment.
   • Choose “Income Tax (Other than Companies)” under the tax applicable section.

5. Fill in the Details

   • Assessment year: Choose the year for which you’re paying tax (e.g., FY 2023-24 = AY 2024-25).
   • Type of payment: Select “Advance Tax”.
   • Enter calculated tax amount.

6. Make the Payment

   • Select your preferred payment mode (Net Banking, Debit Card, UPI).
   • Complete the transaction.

7. Download the Receipt

   • Once the payment is successful, download the receipt with the Challan Identification Number (CIN).
   • Save this for future reference during Income Tax Return (ITR) filing.

2. Offline Method: Through Authorized Banks

If you prefer the offline method, follow these steps:

1. Generate Challan 280

   • Genetare challan as mentioned above for online payment option and select mode of payment as Over the counter

2. Visit an Authorized Bank

   • Choose a bank authorized by the Income Tax Department to accept advance tax payments.

3. Submit the Challan and Payment

   • Deposit the tax amount via cash, cheque, or demand draft at the bank counter.

4. Collect the Stamped Receipt

   • The bank will issue a stamped receipt with the CIN, confirming your payment.

3. Verify Your Payment

After making the payment (online or offline):

1. Log in to the Income Tax Portal.
2. Go to “Tax Credit Statement (Form 26AS)”.
3. Check if the payment is correctly reflected under the respective assessment year.

Consequences of Not Paying Advance Tax

Failing to pay advance tax or paying it late can lead to  interest charges under 234B and 234C under the Income Tax Act, 1961. Here’s a breakdown of what happens if advance tax is not paid on time or in full:

Interest under 234B and 234C

The Income Tax Act prescribes penalties under Sections 234B and 234C for non-payment or underpayment of advance tax:

Section 234B: Interest for Non-Payment or Shortfall in Advance Tax

• Applicability: If a taxpayer fails to pay at least 90% of their total tax liability by the end of the financial year.
• Interest Rate: 1% per month or part of a month on the unpaid amount.
• Duration: From April 1 of the assessment year until the date of payment.

Example:

• Total tax liability: ₹1,00,000
• Advance tax paid: ₹70,000
• Shortfall: ₹30,000
• Interest (April-June): ₹30,000 × 1% × 3 months = ₹900

Section 234C: Interest for Deferment of Advance Tax Installments

• Applicability: If advance tax installments are not paid on time or the payment is less than the required percentage.
• Interest Rate: 1% per month or part of a month on the shortfall amount.

Payment Schedule and Shortfall Penalty:

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:

Conclusion

Advance tax is a crucial element of the Indian tax system, embodying the principle of “pay-as-you-earn.” By requiring taxpayers to pay taxes in installments throughout the financial year, it ensures smoother compliance, reduces financial burden at year-end, and contributes to the country’s fiscal stability.