What is advance tax and who is liable under what circumstances?

We all know of Income Tax – what constitutes it, how it is calculated, how to pay and so on. But some of us may also be liable to pay Advance Tax. For instance, if you make capital gains from stock trading or sale of a property, then you may be liable to pay Advance Tax. You have to pay Advance Tax in instalments, four times a year, as per a fixed schedule. But don’t worry. You can easily pay Advance Tax through your Axis Bank internet banking account. Read on to know if it applies to you

What is Advance Tax?

The tax that an assessee needs to pay in advance in parts (instead of a lump sum) during the financial year is referred to as Advance Tax. It is also known as ‘pay as you earn’ scheme of taxation.

Who is liable to pay Advance Tax?

Under Section 207 every taxpayer –– be it a salaried individual, a freelancer, a professionals such as doctors, lawyers, chartered accountants, architects, etc, or businessmen –– and whose estimated tax liability, i.e. the amount of tax to be paid, for the Assessment Year (AY) is Rs 10,000 or more is liable to pay Advance Tax

In case of salaried individuals, the employer deducts tax at source for ‘Income from Salary’. Hence, the Advance Tax would be payable only if you earn any other income apart from salary, which is not reported to the employer. This could be capital gains, income from house property, dividend income, interest income, etc.

Even an NRI (Non-Resident Indian) who has income accruing in India and the tax payable is more than Rs 10,000.

Who does not have to pay Advance Tax?

Resident senior citizen (i.e., an individual of the age of 60 years or above during the relevant financial year) not having any income from business or profession is not liable to pay advance tax.

Here’s how to compute Advance Tax?

(1) Compute your Gross Total Income (GTI), taking into account incomes under various heads: Salary, Business & Profession; House Property; Capital Gain; and Other Sources.

(2) From the GTI you may claim for deductions such as Section 80C, 80D, 80G, 80E, 80EE, etc., as the case may be, under chapter VI-A of the Income Tax Act, 1961. This would get you to the Net Taxable Income (GTI minus Deductions under chapter VI-A).

(3) Thereafter, apply the tax rates as per the tax slab applicable to calculate your total tax dues. And from the tax dues, do not forget to subtract the tax deducted at source (TDS).

(4) The final amount you derive needs to be paid as Advance Tax.

[Also Read: The early tax filer gets benefits galore]

When should you pay Advance tax?

There are specified dates during the year, before which you should pay a certain amount of tax. The schedule is as follows:

If you have opted for taxation scheme of Section 44AD or Section 44ADA, you can pay the entire Advance Tax liability by 15th of March of the financial year, instead of in instalments.

In case you miss the deadline for the fourth instalment, you can still go ahead and make the payment on or before 31st March. It will be considered as Advance Tax Payment.

What happens if you don’t pay Advance Tax?

Non-payment of Advance Tax will attract penal interest as per the provisions of Section 234B and Section 234C. The interest is 1% simple interest per month calculated on the amount of ‘unpaid Advance Tax’ which is Assessed Tax less the Advance Tax paid if any.

Section 234B: provides for levy of interest for default in payment of advance tax.

This section applies in the following two cases:

a) When the taxpayer has failed to pay advance tax, i.e. default or

b) Where the advance tax paid by the taxpayer is less than 90% of the assessed tax.

Under Section 234C, interest is levied if any instalment(s) is less than the required amount. There is a fixed schedule for how much of the Advance Tax should be paid before each instalment, to avoid the penalty:

If you have opted for presumptive taxation scheme of Section 44AD or section 44ADA, you can pay the entire Advance Tax amount any time before March 15 to avoid the penalty.

Say, after paying one or more instalments, there is a change in your tax liability -- because the total taxable income is either lower or higher than what was estimated for computing advance tax – then you can revise the quantum of advance tax in the remaining instalment(s) and pay the tax as per revised estimates. In case you have paid excess tax, the refund will be processed when the final Income Tax Return is filed.

How to pay Advance Tax?

While paying Advance Tax, you don’t have to submit an estimate or statement of income to the tax authorities. You have to fill Challan No/ITNS 280. As an individual taxpayer, if your accounts are not audited, you can pay Advance Tax either by electronic mode or by physical mode i.e. by depositing the challan at one of the receiving banks. Axis Bank is one of the banks where you can pay Advance Tax.

• Broadly, here’s the process to follow:
• Visit the Tax Information Network (TIN) of the Income Tax Department to proceed with Challan No/ITNS 280
• Fill details in Challan No/ITNS 280, and select the type of payment correctly. If you have any dues to pay while filing your Income Tax Return, select ‘Self-Assessment Tax’
• Select the relevant Assessment Year
• Select the mode of payment – Net Banking or Debit Card
• Enter the captcha code correctly
• Double-check the information you have fed
• Thereafter you will be directed to the bank’s payment page
• After completing the payment, you’ll get a tax receipt wherein the payment details along with BSR code and challan serial number will be displayed
• Declare the taxes. Meaning, furnish the Advance Tax information in your final income tax return
• And last but not the least, keep in mind that Advance Tax is not the final tax. Remember to file your Income Tax Return for the respective financial year before the due date. Do check with your Chartered Accountant or tax consultant on how to calculate Advance Tax and when to pay it.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.