Advance Payment of Tax11/07/2020
Advance Tax, also known as “pay-as-you-earn” taxation, plays a critical role in the Indian income tax system. It requires taxpayers to pay income tax in installments throughout the year, rather than a lump sum payment at the year-end. This approach aims to ease the burden of a large end-of-year tax payment for the taxpayer and to facilitate a steady income flow to the government throughout the fiscal year. The governing provisions for advance tax are primarily found in Sections 207 to 219 of the Income Tax Act, 1961.
Important Provisions for Advance Tax Payment:
- Eligibility for Advance Tax (Section 208):
Any taxpayer, including salaried, self-employed, and businesses, whose tax liability for the year is ₹10,000 or more is required to pay advance tax. However, senior citizens (aged 60 years or above) who do not have income from business or profession are exempt from paying advance tax.
Due Dates for Advance Tax Payment (Section 211):
For Individuals and Corporate Taxpayers:
- 15th June: 15% of advance tax
- 15th September: 45% of advance tax (cumulative)
- 15th December: 75% of advance tax (cumulative)
- 15th March: 100% of advance tax (cumulative)
The due dates may vary for taxpayers who have opted for the presumptive taxation scheme under Section 44AD or 44ADA.
Calculation of Advance Tax (Section 209):
Advance tax is calculated by estimating the current year’s income, applying the applicable tax rates, and considering TDS or any tax credits available to the taxpayer.
Interest for Delay/Deficiency in Payment of Advance Tax (Sections 234B and 234C):
- Section 234B: Interest is charged if the taxpayer has failed to pay advance tax or if the advance tax paid is less than 90% of the assessed tax.
- Section 234C: Interest is charged for the deferment of advance tax, i.e., if advance tax is not paid according to the specified due dates.
Exemption from Advance Tax for Certain Taxpayers (Section 207):
As mentioned, senior citizens not having income from business or profession are exempt from paying advance tax. Additionally, taxpayers opting for the presumptive taxation scheme under Sections 44AD and 44ADA, who pay their entire tax due on or before the 15th March, are also not liable to pay advance tax in installments.
Advance tax can be paid through various channels including online payment using the National Securities Depository Ltd. (NSDL) website, or through designated banks using challan ITNS 280.
Applicability of Advance Tax
Advance tax applies to all taxpayers, including individuals, firms, companies, and other entities, whose tax liability for the year, after adjusting for TDS (Tax Deducted at Source), is ₹10,000 or more. Salaried individuals generally do not have to pay advance tax if their only source of income is salary and tax is deducted by their employer. However, if they have additional income sources, such as interest, dividends, capital gains, or income from business and profession, they may be liable to pay advance tax.
Exemptions from Advance Tax
Senior citizens (those who are 60 years or older and do not run a business) are exempted from paying advance tax. Additionally, taxpayers who opt for the presumptive taxation scheme under Sections 44AD and 44ADA, where income is assumed at a certain percentage of the total turnover or receipts, are exempted from advance tax payments, except when they have income from other sources.
Calculation of Advance Tax
The calculation of advance tax is based on the estimated income for the year. Taxpayers must estimate their annual income, apply the applicable tax rates, and adjust for TDS or any tax credits available. The resulting tax liability, if ₹10,000 or more, should be paid in installments as specified by the income tax department. It’s essential to estimate income as accurately as possible to avoid underpayment or overpayment of tax.
For Individuals and Corporate Taxpayers:
- 15th June: At least 15% of the advance tax liability.
- 15th September: At least 45% of the advance tax liability, minus the amount already paid in the first installment.
- 15th December: At least 75% of the advance tax liability, minus the amount already paid in the first and second installments.
- 15th March: 100% of the advance tax liability, minus the amount already paid in the previous installments.
For taxpayers who opted for the presumptive taxation scheme under Section 44AD or 44ADA, the entire advance tax liability is to be paid on or before the 15th of March of the financial year.
Compliance and Penalties
Failure to pay advance tax or underpayment of advance tax attracts interest under Sections 234B and 234C of the Income Tax Act. Section 234B deals with interest for default in payment of advance tax, while Section 234C addresses interest for deferment of advance tax. It’s crucial for taxpayers to make timely and accurate payments to avoid these penalties.
Adjustments and Refunds
If a taxpayer overestimates their income and pays more advance tax than required, the excess amount will be refunded by the Income Tax Department, along with interest under Section 244A from the 1st of April of the assessment year until the date of refund. Conversely, if the advance tax paid is less than the actual tax liability, the taxpayer will have to pay the balance tax, along with any applicable interest charges, at the time of filing the income tax return.
Role of Advance Tax in Tax Planning
Advance tax plays a significant role in tax planning, enabling taxpayers to manage their tax liabilities efficiently throughout the year. It encourages taxpayers to evaluate their income and deductions periodically, promoting better financial discipline and planning. By estimating their income and making tax payments in advance, taxpayers can avoid the year-end rush and the burden of a lump sum tax payment.
Digital Payment and Compliance
The Income Tax Department has simplified the process of paying advance tax through online payment gateways, allowing taxpayers to make payments via net banking, credit/debit cards, or UPI. Taxpayers can use the Challan 280 form available on the e-tax payment system of the National Securities Depository Limited (NSDL) website or through the income tax e-filing portal. Proper compliance with advance tax requirements not only helps in avoiding interest and penalties but also facilitates a smoother final tax assessment process.