Advance Tax: Who Needs to Pay It and How to Do It Easily

Paying taxes is a responsibility every income-earning individual or business has towards the government. But what happens if your tax liability is significant? That’s where advance tax comes in. Advance tax is a system where you pay your taxes in parts throughout the year rather than in a lump sum at the end of the financial year. Let’s break down everything you need to know about advance tax in simple terms.

What Is Advance Tax?

Advance tax is the income tax that you pay to the government before the financial year ends. Instead of waiting until the end of the year, you can pay your taxes in installments as you earn. This system helps reduce the financial burden on taxpayers and ensures a consistent revenue flow for the government.

Advance tax is especially beneficial for people with a substantial income, as it allows them to distribute their tax liability over the year.

Who Needs to Pay Advance Tax?

As per Section 208 of the Income Tax Act, 1961, anyone whose estimated tax liability for the financial year is ₹10,000 or more is required to pay advance tax.

This rule applies to:

• Salaried individuals: If your employer doesn’t deduct sufficient tax at source (TDS), you may need to pay advance tax.
• Freelancers and self-employed individuals: Since no TDS is deducted from your income, you must calculate and pay advance tax yourself.
• Businesses: Businesses with taxable income are also liable to pay advance tax.

Exemptions:
Senior citizens aged 60 or above who do not have any income from business or profession are exempt from paying advance tax.

When Should Advance Tax Be Paid?

Advance tax is paid in four installments during the financial year. Each installment requires a percentage of your total tax liability.

1. First Installment: June 15 – Pay 15% of your total tax liability
2. Second Installment: September 15 – Pay 45% of your total tax liability (cumulative)
3. Third Installment: December 15 – Pay 75% of your total tax liability (cumulative)
4. Fourth Installment: March 15 – Pay 100% of your total tax liability (cumulative)

If you miss a deadline, you may have to pay interest under Sections 234B and 234C of the Income Tax Act.

How to Calculate Advance Tax

Calculating advance tax involves a few simple steps:

1. Estimate your total income: Include all sources of income, such as salary, business income, rental income, and interest.
2. Deduct eligible deductions and exemptions: Use deductions under sections like 80C, 80D, etc., and account for exemptions.
3. Determine taxable income: Subtract deductions and exemptions from your total income.
4. Calculate tax liability: Apply the relevant income tax slab rates or corporate tax rates.
5. Subtract TDS: Deduct any tax already deducted at source by your employer or other sources.

The remaining amount is your advance tax liability.

Step-by-Step Guide to Paying Advance Tax Online

Paying advance tax is now simple with the online process provided by the Income Tax Department. Follow these steps:

1. Visit the official Income Tax e-filing website: Go to incometax.gov.in.
2. Click on Quick Links: On the homepage, select the “e-Pay Tax” option.
3. Enter PAN details: Provide your PAN (Permanent Account Number) and registered mobile number. Click “Continue.”
4. Verify with OTP: Enter the OTP sent to your registered mobile number to proceed.
5. Choose tax payment type: Select “Advance Tax” under the Income Tax section.
6. Fill in payment details: Provide assessment year, contact details, and bank details.
7. Complete the transaction: You’ll be redirected to the payment gateway. Make the payment using your preferred mode (net banking, debit card, etc.).
8. Confirmation receipt: Once the transaction is complete, you’ll receive a confirmation and an acknowledgment with an invoice number.

Keep this receipt as proof of payment for future reference.

Why Is Advance Tax Important?

Advance tax benefits both taxpayers and the government:

• Reduces year-end burden: Paying tax in installments prevents a large financial outflow at the end of the year.
• Avoids penalties: Timely advance tax payments help avoid penalties and interest under the Income Tax Act.
• Ensures smooth compliance: It simplifies the process of tax payment, making it easier to manage your finances.
• Improves government planning: Regular tax inflow helps the government plan and manage resources efficiently.

What Happens If You Don’t Pay Advance Tax on Time?

Failure to pay advance tax or incorrect payments can lead to penalties and interest. The Income Tax Act imposes:

• Interest under Section 234B: For failure to pay 90% of the total tax liability by March 15.
• Interest under Section 234C: For delayed installments of advance tax.

To avoid these charges, ensure you calculate and pay your advance tax accurately and on time.

Advance tax is a straightforward system that helps taxpayers manage their financial obligations better. By understanding who needs to pay, how to calculate it, and the process of payment, you can stay compliant and stress-free.