Advance Tax: The ‘Pay As You Earn’ System in Indian Income Tax

Advance Tax is a system of paying income tax in installments during the financial year itself, as and when the income is earned, rather than paying a lump sum amount at the end of the year. This concept is based on the principle of “Pay As You Earn” and is mandated by the Income Tax Act, 1961, for certain taxpayers.

The system ensures a steady flow of revenue to the government throughout the year and helps taxpayers manage their tax liability by spreading payments over several months, avoiding a large tax burden at the time of filing their Income Tax Return (ITR).

Who is Liable to Pay Advance Tax?

Every person whose estimated tax liability for the financial year is ₹10,000 or more is generally liable to pay advance tax.

Exemptions:

• Resident Senior Citizens: A resident individual who is 60 years of age or older during the financial year is exempt from paying advance tax, provided they do not have any income from business or profession. This exemption applies irrespective of the amount of their other income (like pension, interest, rent, etc.).

Other taxpayers, including individuals, HUFs, firms, LLPs, companies, etc., are required to estimate their tax liability and pay advance tax if it meets the threshold.

How to Calculate Advance Tax

Calculating advance tax involves estimating your total income and the tax payable on it for the entire financial year. The steps are:

1. Estimate Total Income: Project your income from all sources (salary, business/profession, house property, capital gains, other sources) for the financial year.
2. Estimate Deductions and Exemptions: Account for eligible deductions under sections like 80C, 80D, etc., and applicable exemptions (like HRA in the Old Regime).
3. Calculate Estimated Taxable Income: Subtract estimated deductions and exemptions from the estimated gross total income.
4. Compute Tax Liability: Calculate the tax on the estimated taxable income using the applicable income tax slab rates for the financial year.
5. Add Surcharge and Cess: Include any applicable surcharge (based on income level) and Health and Education Cess (currently 4%).
6. Deduct TDS/TCS: Subtract any Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) that is expected to be credited to your PAN during the financial year.
7. Determine Advance Tax Payable: If the remaining tax amount after deducting TDS/TCS is ₹10,000 or more, you are liable to pay this amount as advance tax.

Due Dates for Advance Tax Installments (For FY 2024-25 / AY 2025-26)

For most taxpayers (excluding those opting for presumptive taxation under Sections 44AD and 44ADA), advance tax is payable in four installments:

Special Provision for Presumptive Taxation (Sections 44AD & 44ADA): Taxpayers who opt for the presumptive taxation scheme under Section 44AD (for eligible businesses) or Section 44ADA (for eligible professionals) are required to pay their entire advance tax liability in a ** single installment** on or before March 15th of the financial year.

How to Pay Advance Tax

Advance tax can be paid conveniently through both online and offline modes:

1. Online Payment: The most common method is through the e-Pay Tax service on the official website of the Income Tax Department. Select the relevant Challan (usually Challan 280 for Income Tax other than companies), the Assessment Year (AY 2025-26 for income earned in FY 2024-25), and select “Advance Tax (100)” as the type of payment.
2. Offline Payment: You can also pay advance tax by generating a challan online or obtaining a physical challan and depositing the amount at designated bank branches authorized to collect income tax.

Ensure you use the correct Assessment Year (AY) corresponding to the financial year (FY) in which the income is being earned (e.g., for income earned from April 1, 2024, to March 31, 2025, the AY is 2025-26).

Consequences of Not Paying or Short Paying Advance Tax

Failure to pay advance tax or paying less than the required amount on time attracts penal interest under the Income Tax Act:

• Interest under Section 234B: This is levied if the taxpayer fails to pay advance tax or if the advance tax paid during the financial year (including TDS/TCS) is less than 90% of the assessed tax. Interest is calculated at 1% per month or part of a month from April 1st of the assessment year until the date of determination of income or completion of assessment, on the amount of shortfall.
• Interest under Section 234C: This is levied for deferment of advance tax installments. If the advance tax paid by a particular installment due date is less than the prescribed percentage, interest is charged at 1% per month or part of a month on the amount of the shortfall for a specified period (typically 3 months for the first three installments and 1 month for the last installment).

INTEREST CALCULATOR: Interest under Section 234A, 234B & 234C Calculator for FY 2024-25 and AY 2025-26

Benefits of Timely Advance Tax Payment

Paying advance tax on time offers several benefits:

• Avoids Penal Interest: The most direct benefit is saving on interest payable under Sections 234B and 234C.
• Manages Cash Flow: Spreading the tax payments throughout the year makes it easier on your finances compared to paying a large sum at once.
• Ensures Compliance: Timely payment is a key aspect of tax compliance, reducing the chances of receiving notices from the Income Tax Department.
• Smoother ITR Filing: Having already paid the substantial portion of your tax liability makes the ITR filing process simpler and often results in a refund or a minimal tax payable at the time of filing.

In conclusion, understanding and adhering to the advance tax provisions is crucial for responsible financial planning and ensuring tax compliance. By estimating your income, calculating the tax liability, and paying the installments by the due dates, you can avoid penalties and contribute to a hassle-free tax experience.