The What & Why Of Advance Tax

What is Advance Tax?

Advance tax is the payment of tax liability of the taxpayers in advance, i.e., before the end of the year. It is known as the “pay-as-you-earn” scheme. The advance tax is paid in installments throughout the year. 

The income tax act, 1961 has prescribed due dates on which the taxpayer has to pay advance tax. The benefit of paying advance tax is that you don’t have to pay the whole tax in a lump sum. 

Calculation Of Advance Tax

Step 1: Estimate your total income for a financial year.

Step 2: Deduct the amount of all deductible expenses/investments made during the year.

Step 3: Now, compute the tax on the remaining income.

Step 4: Reduce the amount of TDS/TCS/MAT. The remaining tax liability is your advance tax liability. And, such advance tax is required to be paid in fourinstallments by using Challan 280.

Who Is Required To Pay Advance Tax?

When the estimated tax liability of an individual exceeds Rs. 10,000 in a financial year, then he/she has to pay advance tax. Such tax liability is calculated after deducting TDS/TCS and MAT credits.

However, if an assessee fulfills all the below conditions, then he shall not be liable to pay advance tax:

• Assessee is a senior citizen
• Must be a resident of India, and
• No income from business and profession 

Due Date Of Payment Of Advance Tax

Here are the due dates of installments on which both individuals and corporate taxpayers have to pay advance tax:

For taxpayers who are not covered under presumptive taxation scheme under section 44AD & 44ADA – Business Income

For taxpayers who have are covered under presumptive Taxation Scheme under section 44AD & 44ADA – Business Income

Taxpayers covered in this option have to pay advance tax in a lump sum, i.e., in one installment only.

Special provision to pay advance tax on capital gain

Assessee can’t estimate the exceptional gains, i.e., capital gain, winnings from the lottery, or dividend income in advance. Therefore, it is not possible to pay tax on such incomes in advance.

To make it simple for the taxpayers, the government allows to pay advance tax on such incomes in remaining installments after the receipt of income. Further, if there is no installment due, then the assessee can pay tax by 31^st March of the relevant financial year without any interest payment.

Consequences of non-payment of advance tax

When you calculate your actual tax liability, the advance tax gets adjusted from this. There can be two circumstances:

 Conclusion

Advance tax is paid only on an estimated basis; therefore, you can take the estimate of your total income that is expected to receive during a financial year. To avoid penalty and interest, it is advisable to deposit the advance tax on or before the due date of the installment.