Answer By law4u team
In India, advance tax is the tax that is paid in installments throughout the financial year, instead of paying the entire amount at the end of the year. The purpose of advance tax is to ensure a continuous flow of revenue for the government. It is based on the estimated total income of the taxpayer for the year. Taxpayers who are expected to have a tax liability of ₹10,000 or more in a financial year are required to pay advance tax.
Who Is Required to Pay Advance Tax in India?
Individuals:
Self-employed individuals (like freelancers, consultants, etc.) and professionals (like doctors, lawyers, etc.) who are not subject to TDS (Tax Deducted at Source) and have a tax liability of ₹10,000 or more during the financial year are required to pay advance tax.
Companies:
Corporate entities (both private and public limited companies) are required to pay advance tax if their total tax liability exceeds ₹10,000 in the financial year. The advance tax is paid in installments, just like for individuals.
Hindu Undivided Families (HUFs):
A Hindu Undivided Family (HUF) is also required to pay advance tax if the family has an income and the total tax liability exceeds ₹10,000 during the year.
Partnership Firms:
Partnership firms, whether registered or unregistered, are required to pay advance tax if their income and tax liability exceed ₹10,000.
LLPs (Limited Liability Partnerships):
Like partnership firms, LLPs are also required to pay advance tax if their tax liability crosses ₹10,000.
Freelancers and Professionals:
Freelancers and other professionals (such as artists, writers, etc.) who are earning income through self-employment and whose total tax liability exceeds ₹10,000 must pay advance tax.
Who Is Exempt from Paying Advance Tax?
Salaried Employees:
Salaried individuals are generally not required to pay advance tax, as their employer deducts TDS (Tax Deducted at Source) on their behalf. This means that the tax is already being paid by the employer throughout the year, and the employee doesn’t have to worry about advance tax payments.
Exception: If a salaried person has income from other sources (such as freelance work, interest, or rent) that leads to a total tax liability exceeding ₹10,000, they may be required to pay advance tax on that additional income.
Agricultural Income:
If a taxpayer's income consists entirely or mainly of agricultural income, it is exempt from income tax under the Income Tax Act, and thus advance tax is not applicable.
Income Below ₹10,000:
If a taxpayer's estimated total tax liability for the financial year is less than ₹10,000, they are not required to pay advance tax. In this case, the taxpayer can pay their taxes in a lump sum at the time of filing their tax return.
Advance Tax Payment Criteria:
Threshold Limit:
Taxpayers whose total tax liability for the financial year exceeds ₹10,000 are required to pay advance tax in installments.
The tax liability includes all kinds of income, including salary, business income, capital gains, interest income, rental income, etc.
Income Estimation:
Taxpayers need to estimate their income for the year and calculate the tax payable on that estimated income. The amount of advance tax payable is based on the total tax payable after estimating their income.
Due Dates for Advance Tax Payments:
Taxpayers who are required to pay advance tax must do so in the following installments:
- 1st Installment: By 15th June – At least 15% of the estimated advance tax liability.
- 2nd Installment: By 15th September – At least 45% of the estimated advance tax liability (cumulative with the 1st installment).
- 3rd Installment: By 15th December – At least 75% of the estimated advance tax liability (cumulative with the previous installments).
- 4th Installment: By 15th March – The remaining 100% of the total advance tax liability.
How to Estimate Advance Tax Liability:
To calculate advance tax, taxpayers must estimate their income for the year and calculate the tax payable based on the prevailing tax slabs. The amount is then paid in four installments as mentioned above.
Penalties for Non-Payment or Late Payment of Advance Tax:
Interest under Section 234B:
If the advance tax is not paid, or if the taxpayer pays less than the required amount, they may have to pay interest under Section 234B at 1% per month on the unpaid tax from the due date of payment until the tax is paid.
Interest under Section 234C:
If the taxpayer fails to pay the correct installment of advance tax by the due date, they may be charged interest under Section 234C at 1% per month on the shortfall amount.
Example:
Let’s say Mr. Raghav, a self-employed professional, estimates that his total income for the financial year will be ₹12,00,000, and his tax liability (after deductions) comes to ₹1,20,000.
- By 15th June, he must pay ₹18,000 (15% of ₹1,20,000).
- By 15th September, he must pay ₹54,000 (45% of ₹1,20,000).
- By 15th December, he must pay ₹90,000 (75% of ₹1,20,000).
- By 15th March, he must pay the remaining ₹1,20,000 (total tax liability).
Conclusion:
In India, individuals, companies, firms, and Hindu Undivided Families (HUFs) who have a tax liability of ₹10,000 or more are required to pay advance tax. This payment is made in installments throughout the financial year. Salaried individuals are generally exempt, as their employer deducts TDS on their behalf. Advance tax is an important part of tax planning and ensures the timely collection of taxes by the government.
