Advance payment of Tax, also known as ‘pay-as-you-earn’ taxation, is a mechanism in the Indian tax system where taxpayers are required to pay income tax in the same year that the income is received. This approach ensures that the government receives a steady flow of income throughout the year and helps taxpayers avoid a large tax liability at the end of the financial year.
Concept of Advance Tax
Advance tax applies to all taxpayers, including salaried, freelancers, and businesses, whose tax liability is expected to be ₹10,000 or more during the fiscal year. This payment must be made in installments as specified by the Income Tax Department, rather than as a lump sum payment at the year’s end.
Who Should Pay Advance Tax?
Advance tax should be paid by all assesses if their tax liability, after accounting for TDS (Tax Deducted at Source), is ₹10,000 or more. This includes self-employed individuals, professionals, businessmen, and companies. However, senior citizens (aged 60 years or above) who do not run a business are exempt from paying advance tax.
Payment Schedule
The payment of advance tax is divided into installments as follows for individual taxpayers:
- 15% of tax liability by the 15th of June
- 45% of tax liability by the 15th of September
- 75% of tax liability by the 15th of December
- 100% of tax liability by the 15th of March
For corporate taxpayers, the schedule is slightly different:
- 15% by 15th June
- 45% by 15th September
- 75% by 15th December
- 100% by 15th March
Calculation of Advance Tax
To calculate advance tax, taxpayers must estimate their total income for the year. This includes all sources of income such as salary, interest, dividends, business profits, and any other income. Then they must apply the current income tax rates to compute their tax liability for the year. From this figure, they must subtract any TDS or tax credits available to determine the amount of advance tax due. It’s essential to estimate income as accurately as possible to avoid underpayment or overpayment of tax.
Interest and Penalties for Non-compliance
Failure to pay advance tax can lead to penalties. If advance tax is not paid according to the schedule, interest under sections 234B and 234C of the Income Tax Act will be applicable. Section 234B deals with interest for default in payment of advance tax, where if the taxpayer has paid less than 90% of the assessed tax, interest is charged at 1% per month or part of the month for the unpaid amount. Section 234C addresses the delay in installment payments, charging interest at 1% per month or part of the month on the differential amount.
Benefits of Paying Advance Tax
Paying advance tax has several benefits:
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Avoids Accumulation of Tax Liability:
By spreading the tax payment throughout the year, taxpayers can avoid the burden of a lump sum payment.
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Reduces Burden of Last-Minute Tax Planning:
Paying taxes in advance helps in better financial planning and avoids last-minute rushes.
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Helps in Cash Flow Management for Businesses:
Regular payment of tax helps businesses manage their cash flow more efficiently.
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Avoids Interest and Penalties:
Timely payment of advance tax helps avoid interest charges and penalties for non-compliance.
How to Pay Advance Tax?
Advance tax can be paid through both offline and online methods. For offline payment, one can deposit tax using challan 280 in banks designated by the Income Tax Department. Online payments can be made through the National Securities Depository Limited (NSDL) website or the e-payment portal of the Income Tax Department.