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What is Advance tax & How is it Calculated?

What is Advance tax & How is it Calculated?

advance tax in India

Every citizen of India is liable to pay tax if their income comes under the Income Tax bracket. The government depends mainly on its tax collection to finance its spending throughout the year. This funding is utilized in the development of nation, reforming infrastructure, and the betterment of society, which helps in shaping the economy of the country. There is a tax structure in India that is followed and as per the tax slabs; individuals are required to pay their taxes. Let us understand about advance tax and how advance tax is calculated in India.

What is Advance Tax?

Advance tax is the amount of income tax that should be paid much in advance instead of lump-sum payment at the year-end in instalments as per the due dates given by income tax department. Advance tax is also known as 'pay as you earn' tax and is supposed to be paid in the same year the income is received.

Who Needs to Pay Advance Tax?

As per section 208 of Income Tax Act, a taxpayer needs to pay advance tax if their tax liability is 10,000 or more in a financial year. For instance, if your tax liability for the FY 2019-2020 exceeds 10,000, then you are required to pay advance tax in the same year.

Advance tax is for those who earn money from sources other than salary. It is applicable for self-employed individuals, professionals, and business men if their income exceeds a certain limit This includes money that comes from shares, interest earned on fixed deposits, rent or income received from house tenants. Senior citizens who are more than 60 years of age are exempt to advance tax.

Know all about tax exemption in India.

How to Calculate Advance Tax?

Listed below are the 4 steps that will help you calculate advance tax:

1. Make an estimate of the total income earned by you other than your salary.
2. Subtract all expenses from your income, including medical insurance premiums, phone costs, travel expenses, etc.
3. Now, add other income that you received apart from your salary. This includes interest from FDs, house rent, lottery earnings, etc.
4. If the amount of tax calculated is more than 10,000, then you are liable to pay advance tax.

Click here to use - Income Tax Calculator

Example of Advance Tax Calculation

Naveen is a salaried professional. For the FY 2020-21, Naveen estimated that his annual gross receipts would be Rs 40,00,000, his expenses would be Rs 24,00,000. Naveen deposited Rs 80,000 in his PPF account for his post-retirement expenses. He also paid Rs 50,000 towards his life insurance premium. Further, he paid Rs 24,000 towards his health insurance. The professional receipts of Naveen are subject to TDS. He estimated a TDS of Rs 60,000 on certain professional receipts for the FY 2020-21. Besides, he estimated an interest of Rs 10,000 on fixed deposits held by him. Here is how advance tax on Naveen’s salary will be calculated:

Income Estimation for Advance Tax Amount (in Rs.) Amount (in Rs.)
Income Details:
Gross Receipts 40,00,000
Less: Expenses 24,00,000 16,00,000
Income from Other Sources:
Interest from Fixed Deposit 10,000
Gross Total Income 16,10,000
Less: Deduction under Section 80C
Contribution to PPF 80,000
Life Insurance Premium 50,000
1,30,000
Deduction Under Section 80D 24,000 1,54,000
Total Income 14,56,000
Total Tax Liability 16,40,839
Add: Health & Education Cess 63,109
17,03,948
Less: TDS 60,000
Assessed Tax 15,80,839

How to Pay Advance Tax?

Just like regular tax payment, advance tax payment is also done using challan. There are many banks that allows you to pay advance tax through challans. You can also pay advance tax online from the comfort of your home. Here's a step-by-step guide that will help you pay advance tax online without any hassles –

1. To pay advance tax online, you need to click on the government's official website - http://www.tin-nsdl.com
2. Choose the correct challan that is ITNS 280, ITNS 281, ITNS 282 or ITNS 284 as relevant to pay your advance tax.
3. Fill in your PAN card details along with other important information such as your address, phone number, e-mail address, bank name, etc.
4. Once you have entered all the details, you will be redirected to the net-banking page of the website.
5. Now, you will receive all the information regarding your payment. Enter all payment details and pay your advance tax online successfully.

What are the Benefits of Advance Tax?

Here's a list of benefits you get when you pay tax in advance -

1. It reduces the burden of paying tax at the last moment.
2. It helps in mitigating stress that a taxpayer may undergo while making tax payment at the end of fiscal year.
3. It saves people from failing to make their tax payments.
4. It helps in raising government funds as the government receives interest on the tax collected.

What are Due Dates for Payment of Advance Tax?

Here's a schedule of advance tax payment for individual and corporate taxpayers –

Due Dates Advance Tax Payable
On or before the 15th of June 15% of advance tax liability
On or before the 15th of September 45% of advance tax liability
On or before the 15th of December 75% of advance tax liability
On or before the 15th of March 100% of advance tax liability

FAQs Related to Advance Tax Payment

Advance tax is payable by citizens who have source of income other than their salary. If an assessee is a senior citizen, or the individual do not have any income from business or profession, they are not eligible to pay advance tax. Here are a few frequently asked questions on advance tax payment in India:

1. When should I pay advance tax?

If your tax liability is Rs.10,000 and above, you are eligible to pay advance tax. Further, you should be a salaried professional or self-employed individual. If you are earning through rentals from house or property, you should pay advance tax. Also, if you earn interest from any Fixed Deposits on your name, you are eligible for advance tax payment.

2. What happens if I pay advance tax less/more than necessary for a financial year?

If the taxpayer has deposited less than 90% of the total tax liability, interest will be levied under Section 234B. The individual has to pay interest at the rate of 1% per month. Whereas if you pay a higher advance tax or advance tax more than necessary, you will receive the excess amount as a refund. Income Tax department will pay interest at the rate of 6% per annum to the taxpayer on the excess amount if the amount is more than 10% of the tax liability.

3. What is the penalty if I miss the due dates of paying Advance Tax?

Failing to pay advance tax by due dates result in penalty. Penalty will be levied on the unpaid amount of advance tax at 1% simple interest per month of part of the month under Section 234B. If the taxpayer doesn’t make the full payment, interest is levied on the shortfall amount. And in case of shortfall for payment, interest will be levied for a period of 3 months under Section 234C.

4. Can I claim deduction under Section 80C while estimating income for calculating my advance tax?

Yes. Deduction can be claimed under Section 80C while estimating income for calculating advance tax.

5. Is an NRI Liable to pay advance income tax?

If you are an NRI and you receive your salary in an Indian bank account, your salary is subjected to Indian Tax Laws. The last date to file income tax return in India for NRIs is July 31st. And being an NRI, if your tax liability exceeds Rs.10,000 in a financial year, you are required to pay advance tax.

As a citizen of India, you must pay your taxes on time. If you fail to do so by a stipulated timeline, then you are subject to pay a certain amount in the form of penalty as per Income Tax Act, 1961. Besides, if you are planning to buy a tax savings plan online, prefer to go with Canara HSBC Oriental Bank of Commerce Life Insurance.

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