What Is Advance Tax? Here Is Step By Step Guide To Calculate

The advance tax is also known as a pay-as-you-earn tax that is paid in advance according to your income. It is paid to the Income Tax Department as per the due dates set by the department itself. But before paying the advance tax, you have to calculate the estimated total income for the year and then calculate the tax amount on it. Here in the article, we share how to calculate the advance tax, what are its benefits and who is required to pay the tax.

What is an Advance tax?

The advance tax is an amount that is paid in advance instead of a lump-sum payment at the year's end. This tax is also known as earn tax, the advance tax is paid in instalments according to the due dates decided by the income tax department.

There are four due dates for payment of tax in instalments. The individuals whose estimated income for the year is Rs. 10 thousand or more have to pay the advance tax. And all the businesses, irrespective of their income are required to pay the advance tax. The advance tax has multiple benefits such as reducing tax burden at the end of the financial year, avoiding penalties or increasing the financial discipline of individual taxpayers and businesses. 

Who is Liable to Pay Advance Tax?

• According to Section 208 of the Income Tax Act, of 1961, a taxpayer is required to pay advance tax if their liability is 10 thousand or more in a financial year. This is after adjusting the TDS. For instance, if your tax liability for the financial year 2023-24 exceeds Rs. 10 thousand then you have to pay advance tax in the same year.
• The advance tax is for those who earn money other than their salary. It is implemented on self-employed individuals, professionals, and business persons if their income exceeds a certain limit. 
• The advance tax is implemented on income that comes from FDs, interest from shares, FDs, and rent. Senior citizens who are above the age of 60 years are exempted from paying the advance tax.

Due Dates for Advance Tax Payment for FY 2023-24

Tax advance payment for business owners and self-employed:

Tax advance payment for companies:

Benefits of Advance Tax

Paying advance tax in India has several benefits to individual taxpayers and businesses. The major advantages of advance tax are as follows:

For Individuals

• Low Financial Burden: through advance tax, you can pay your tax liability in small instalments instead of paying a lump sum payment at the end of a year.
• Financial Discipline: By paying the advance tax, you can manage your financial plans and create discipline. So, in this, you have to check your income, track your earnings, and plan your finances accordingly. 
• Tax Return Benefits: At the end of the year, your advance tax payment gets settled against your financial liability for the complete year. It will reduce the chance of an outstanding amount, for a smoother tax filing process.

For Businesses

• Better Cash Flow Management: The businesses allocate funds for advance tax payments that help prevent the potential cash flow at the end of the financial year.
• Compliance Assurance: Payment of advance tax from time helps in complying with the tax regulations, and avoids issues with authorities and their potential penalties.
• Investment Opportunity: The payment of advances taxes helps to make business capital available for reinvestment in other areas, and also promotes growth and development.
• Simple Tax Filing: The businesses can adjust the advance tax payment against their final tax liability. Eventually, this creates a simple tax filing process at the end of the year.

Overall, the advance tax benefits both individuals and businesses in financial discipline, manages cash flow, follow all compliances and creates a smoother tax filing experience. So, the advance tax is a great tool for financial management in India.

How to Calculate the Advance Tax for FY 2023-24?

Here is the formula to calculate the advance tax:

• Select the taxpayer type; Individual, HUF, BOi/AOPs, Domestic Company, Foreign Company, Firms, LLP, Co-operative Society.
• Fill Net Taxable Income, Income Tax, Surcharge, Education Cess, Secondary and higher education cess, Total Tax Liability, Relief, TDS/TCS/MAT Credit Utilised, and Assessed Tax. 
• Lastly, click on Calculate and your calculated advance tax will appear on the screen.

Late Payment and Interest on Advance Tax

The penalties for missing advance tax payments after the due date are as follows: 

• As per Section 234B of the Income Tax Act, if you pay less than 90% of your total assessed tax as advance tax, then you will be charged an interest of 1% per month.
• The interest will be calculated as 1% on the defaulted amount for each month until the tax is fully paid. 
• A similar interest penalty will be applicable in case you miss the second or third deadline. According to Section 234C of the Income Tax Act, if you fail to pay your advance tax instalment on time, you will be charged an interest rate of 1%.

Conclusion

To conclude, if the income tax department finds that you have paid more tax than your usual liability, then it will refund the advance tax. The taxpayer can file or refund tax by submitting a Form 30. However, they have to claim this within one year from the last year of the assessment year.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.