Advance Tax – Applicability, Due Dates and Calculation
Here’s an easy guide to understand the various provisions of advance tax. Such as what is advance tax, its applicability, calculation, due date & payment of advance tax by a taxpayer.
Advance tax is a proactive way to manage your tax responsibilities. Instead of paying your entire tax liability at the end of the year, you pay it in installments throughout the financial year.
This not only helps you stay organized but also prevents last-minute financial stress. In this article, we’ll walk you through the basics of advance tax, why it matters, and how it can benefit you. Let’s get started
What is Advance Tax?
Advance tax is an important aspect of Income Tax. As per Section 208 of the Income Tax Act, every person whose estimated tax liability for the year is Rs. 10,000 or more is liable to pay advance tax.
In simple words, we can say that the advance tax provision requires taxpayers to pay their tax liability in installments over the course of the financial year, rather than waiting until the end of the year to pay a lump sum.
This helps the government in the timely collection of revenue and ensures a steady flow of funds to meet its expenditure commitments.
Who is liable to pay advance tax?
Advance tax is applicable to almost all taxpayers, including individuals, HUFs, firms, companies, and other entities that are liable to pay income tax. The applicability depends on the estimated tax liability for the financial year.
Every person whose estimated tax liability for the year is Rs. 10,000 or more, shall pay his tax in advance, in the form of “advance tax”.
However, a resident senior citizen (60 years or above) who doesn’t have any income from business or profession during the relevant financial year is not liable to pay advance tax.
Thus, Senior citizens are exempt from paying the advance tax but they are still required to pay self-assessment tax if applicable.
Key Features -Advance Tax
Here are the key features and purposes of advance tax:
Installment-Based Payments: Advance tax is paid in multiple installments, typically four, during the financial year. These installments are spread out at regular intervals to ensure a consistent inflow of tax revenue for the government.
Estimation of Tax Liability: Taxpayers are required to estimate their total income for the financial year and calculate their tax liability accordingly. This includes considering income from various sources, deductions, exemptions, and other relevant factors.
Due dates for payment of advance tax
Advance tax is to be paid in different installments. The due dates for payment of different installments of advance tax are as follows:
- 15% of the total tax liability by 15th June
- 45% of the total tax liability by 15th September
- 75% of the total tax liability by 15th December
- 100% of the total tax liability by 15th March
|Due Date||Advance Tax Amount (For All Taxpayers except those who|
opted for presumptive taxation scheme U/s 44AD/44ADA)
|On or before 15th June||Minimum 15% of advance tax liability|
|On or before 15th September||Minimum 45% of advance tax liability|
|On or before 15th December||Min. 75% of advance tax liability|
|On or before 15th March||100% of advance tax liability|
Important Note: If the last date for payment of any installment of advance tax is a day on which the
banks are closed (due to holidays etc.), then the tax can be paid on the next immediately following working day.
In such cases, the mandatory interest leviable under sections 234B and 234C would not be charged.
Payment of Advance tax in case of Presumptive taxation scheme
If you have opted for the presumptive scheme of taxation U/s 44AD/ 44ADA. In such a case, you are not liable to pay advance tax every quarter in installments. Instead, you will pay the whole amount of your advance tax in one installment on or before 15 March of the year.
Therefore, taxpayers who opted for the presumptive taxation scheme are liable to pay the whole amount of advance tax (100%) on or before 15 March of the previous year
Advance Tax Payment Due Dates-FY 2023-24
Find below the advance tax payment due dates for the financial year 2023-23 & AY 2024-25
|Installment||Due Date||Percentage of Advance Tax|
|1st Installment||On or before 15th June||15% of advance tax liability|
|2nd Installment||On or before 15th September||45% of advance tax liability|
|3rd Installment||On or before 15th December||75% of advance tax liability|
|4th Installment||On or before 15th March||100% of advance tax liability|
Benefits of Payment of Advance Tax on Time
Advance tax payment is a good financial practice that offers numerous advantages, including reduced financial stress, better cash flow management, improved creditworthiness, and compliance with tax laws. It’s a proactive approach to managing your tax liabilities and securing your financial future.
Advance tax payment offers several benefits for individuals and businesses which are as follows:
Avoiding Section 234B & 234C Penalties
One of the primary benefits is that it helps you avoid penalties and interest charges u/s 234B & 234C. Tax authorities often impose penalties if you don’t pay your taxes on time or if you underpay significantly. Advance tax payments ensure you meet your tax obligations timely and accurately, minimizing the risk of penalties.
Improved Financial Planning
Paying taxes in installments throughout the year allows for better financial planning. You can allocate funds strategically and avoid the stress of having to come up with a lump sum at the end of the fiscal year.
Reduced Tax Burden
Advance tax spreads your tax liability over multiple payments, making each installment more manageable. This can help reduce the financial burden compared to paying a large sum all at once.
Meeting your advance tax obligations ensures you comply with tax laws and regulations. This minimizes the risk of legal issues and associated costs.
Enhanced Cash Flow Management
By paying taxes periodically, you retain more liquidity in your business or personal finances. This can be particularly crucial for businesses, allowing them to invest in growth opportunities, manage cash flow, and cover operational expenses without being overly constrained by tax payments.
Timely payment of advance tax can positively impact your creditworthiness and trust. Lenders and financial institutions often assess your tax compliance when making lending decisions. Consistently paying advance tax on schedule demonstrates financial responsibility.
Advance tax payments provide a clear and predictable tax liability throughout the year. This makes budgeting and financial forecasting more accurate and less prone to surprises.
Potential Tax Savings
By estimating your annual income and paying taxes in advance, you have the opportunity to explore tax-saving strategies. You can take advantage of deductions, exemptions, and credits to reduce your overall tax liability.
Peace of Mind
Knowing that you’re staying ahead of your tax obligations can provide peace of mind. You won’t have to worry about a substantial tax bill looming over you at the end of the year.
Interest and Penalty for late payment of Advance Tax
Taxpayers who are required to pay advance tax but fail to do so or make short payments may be subject to interest and penalties under sections 234B and 234C of the Income Tax Act.
These interest and penalties are imposed to ensure compliance with the advance tax provision.
Section 234B – Penalty for Default in Payment Advance Tax Payment
The penalty under Section 234B of the Income Tax Act is attracted if:
- A taxpayer has failed to pay advance tax though he is liable to pay advance tax; or
- The advance tax paid by the taxpayer is less than 90% of the tax liability.
Therefore, if 90% of the advance tax payment that is payable is not paid before the end of the financial year then 1% interest is chargeable U/s 234B.
Section 234C – Penalty for late payment of Advance Tax
Section 234C imposes interest on taxpayers who fail to pay their taxes on time during the financial year.
Thus, as per Section 234C, if the advance tax is not paid on time, then penal interest@1% per month or part of the month is applicable. This 1% interest is simple interest. The interest is calculated from the due date to the date of payment.
For example, if you were liable to pay 3 lakhs as advance tax by June 15, but you made the payment on September 15. In that case, because of delayed payment, interest U/s 234C @1% will be charged for four months.
Adjustment and Refunds
Any excess payment of advance tax is adjusted against the final tax liability for the financial year. If there is still an excess amount, it is refunded to the taxpayer.