Understanding Advance Tax: Who Needs to Pay and How to Calculate It?

Introduction

Advance tax is a system under which taxpayers are required to pay their taxes in installments throughout the financial year instead of making a lump sum payment at the end. This ensures a steady flow of revenue for the government and reduces the burden on taxpayers at the time of filing their returns.

Who Needs to Pay Advance Tax?

According to the Income Tax Act, any individual, business, or entity whose estimated tax liability for the financial year exceeds Rs 10,000 is required to pay advance tax. The following categories of taxpayers must comply with this rule:

1. Salaried Individuals with Additional Income: Salaried individuals whose employers deduct Tax Deducted at Source (TDS) do not usually need to pay advance tax unless they have additional sources of income like rental income, capital gains, or interest income.

2. Self-Employed Professionals & Freelancers: Individuals earning from business, profession, or freelancing must calculate and pay advance tax if their total tax liability exceeds Rs 10,000.

3. Businesses: Companies and firms generating taxable income are required to pay advance tax based on their expected earnings.

4. Senior Citizens: Senior citizens (aged 60 and above) who do not have income from a business or profession are exempt from paying advance tax.

How to Calculate Advance Tax?

Advance tax is calculated based on estimated income for the financial year. Here’s a step-by-step method to compute and pay advance tax:

1. Estimate Total Income: Calculate the expected income from all sources (salary, business, capital gains, rent, interest, etc.).

2. Deduct Eligible Deductions: Apply deductions under Sections 80C, 80D, 80E, and other applicable sections to arrive at the taxable income.

3. Compute Tax Liability: Use the applicable income tax slab rates to calculate the total tax payable.

4. Subtract TDS (if any): Reduce the tax deducted at source (TDS) from your estimated tax liability.

5. Determine Advance Tax Installments: If the remaining tax liability exceeds Rs 10,000, it must be paid as per the following schedule:

Penalty for Non-Payment of Advance Tax

Failure to pay advance tax results in interest penalties under Sections 234B and 234C of the Income Tax Act:

• Section 234B: Interest at 1% per month if at least 90% of total tax liability is not paid before the financial year ends.
• Section 234C: Interest at 1% per month if advance tax is not paid as per the specified installment schedule.

Conclusion

Advance tax is a crucial compliance requirement for individuals and businesses with taxable income exceeding Rs 10,000. By understanding the calculation method and due dates, taxpayers can avoid interest penalties and manage their tax payments efficiently. Keeping track of earnings and paying tax in a timely manner ensures smooth financial planning and tax compliance.