All you need to know about Advance Tax

The government collects Income Tax on a quarterly basis in the form of advance tax before the end of a financial year, ensuring constant flow of tax revenue during the year rather than at the year-end.

Advance Tax is required to be paid by the taxpayer in specified installments, as per the due dates provided by the income tax laws. The first installment of advance tax for the Financial Year 2020-21 is due on  June 15, 2020.

Advance tax is payable, if the total estimated tax liability after tax deduction or collection at source and Foreign Tax Credit exceeds Rs 10,000. What that means is that every tax payer has to estimate his Annual Taxable Income, calculate the tax that will have to paid on such income, reduce the TDS and other tax credits, and if the balance tax payable exceeds Rs. 10,000, he needs to pay that to the government in 4 installments.

It is worthwhile to note that the estimated tax liability should be revisited at regular intervals to ensure that correct taxes are deposited by way of advance tax to avoid penal interest.

Advance tax can be paid online or offline by using Challan ITNS 280. It can be paid online at https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp

The due dates for payment of advance tax by individuals for FY 2020-21 and the amount payable (plus applicable surcharge and cess) are:

Interest and penalty

Interest at 1 per cent a month is levied for the period of delay in payment.

Further, as income from capital gains cannot be anticipated, advance tax on capital gains becomes payable starting from the quarter in which the capital asset is sold.

Further, if the total amount of advance tax paid in all four installments amounts to less than 90 per cent of the taxpayer’s actual tax liability, interest is payable at the rate of 1 per cent per month from April 1, until balance payment of the tax is made.

Frequently Asked Questions

1. Why only businesses pay advance tax and no salaried employee pays advance tax, no matter how high is the salary?

The advance tax law is applicable to all taxpayers including salaried employees. However, in case of Salary, the employer generally deducts the entire tax payable at source (TDS) and hence there is very little or no tax payable after such TDS deduction. In case of businesses, TDS is deducted at 0%, 1%, 2%, 5% or 10% for various different kinds of trades and services whereas the highest tax rate is 30%. Hence, in many cases such deduction does not account for the entire tax liability and further tax is payable.

However, if such employees have other sources of income, they are required to make payment of advance tax to avoid penal interest.

2. Will I be penalized if I do not pay advance tax?

Non payment of advance tax will result in levy of interest under Sections 234B and 234C of the Income tax Act, 1961.

3. If advance tax is payable on estimated basis, why is interest charged in case estimations are short of actual tax?

The government understands that estimates cannot be 100% accurate and hence has given a 10% margin of variation. In case you have paid 90% of the total actual tax due, no penal interest will be charged.