Answer By law4u team
Advance tax is the tax that an individual or entity is required to pay in advance, rather than waiting until the end of the year to make a lump sum payment. This is a way to ensure that the government receives a steady flow of income throughout the year. Advance tax is applicable to individuals, corporations, and other entities whose tax liability for the year exceeds a certain threshold. In India, the Income Tax Act, 1961 mandates the payment of advance tax under the following conditions: If you are earning income that is not subject to tax deduction at source (TDS), like income from business, profession, or capital gains. If your total tax liability for the year exceeds ₹10,000 after considering TDS and any other rebates. Steps to Calculate Advance Tax 1. Estimate Total Income for the Year To calculate advance tax, the first step is to estimate your total income for the year. This includes: Salary income Income from business or profession Capital gains Rental income Other sources of income (interest, dividends, etc.) 2. Calculate the Net Taxable Income Once you have an estimate of your total income, subtract any applicable deductions to arrive at your net taxable income. Common deductions include: Under Section 80C (investments in PPF, life insurance, ELSS, etc.) Under Section 80D (premium paid for health insurance) Under Section 80G (donations to charity) Section 24 (interest on home loan) 3. Calculate the Taxable Amount After applying deductions, calculate the taxable income. For individuals, the tax is levied based on income slabs that vary depending on the age and income level. For example, for individuals below 60 years, the income tax slabs are as follows (for the FY 2023-24): Up to ₹2.5 lakh: No tax ₹2.5 lakh to ₹5 lakh: 5% ₹5 lakh to ₹10 lakh: 20% Above ₹10 lakh: 30% Additionally, there may be cess and surcharge applied to the total tax payable: Health and Education Cess: 4% of the total tax liability Surcharge: Applicable for income exceeding ₹50 lakh, ₹1 crore, etc. 4. Calculate Advance Tax Based on the Income Advance tax is typically paid in installments throughout the financial year. The amount of tax payable in each installment is based on your estimated total tax liability for the year. Here’s how advance tax payments are structured for individuals and Hindu Undivided Families (HUFs): Advance Tax Payment Schedule: 1. On or before 15th June: Pay 15% of the total advance tax liability. 2. On or before 15th September: Pay 45% of the total advance tax liability (less the amount already paid). 3. On or before 15th December: Pay 75% of the total advance tax liability (less the amount already paid). 4. On or before 15th March: Pay 100% of the total advance tax liability. 5. How to Calculate Advance Tax: 1. Calculate Total Taxable Income: Add all sources of income (salary, business income, capital gains, etc.) and subtract applicable deductions to arrive at the net taxable income. 2. Calculate Tax on Total Income: Apply the tax slabs to the taxable income to calculate the total tax payable. Don't forget to account for the cess and surcharge. 3. Break Down the Payment by Installment: Based on the total tax payable, divide the payment according to the dates mentioned above (15th June, 15th September, etc.). For example: If your estimated total tax liability is ₹100,000, your payments would be: 15% of ₹100,000 by 15th June = ₹15,000 45% of ₹100,000 by 15th September = ₹45,000 75% of ₹100,000 by 15th December = ₹75,000 100% of ₹100,000 by 15th March = ₹100,000 You pay the installments progressively, with each installment adding up to the total estimated tax liability for the year. 6. Adjust for Tax Already Paid (TDS or TCS) If tax has already been deducted at source (TDS) from your income (e.g., salary, interest, etc.), or if you have already paid any tax in the form of Tax Collected at Source (TCS), this amount will be adjusted against the advance tax. For example, if your employer has deducted ₹20,000 as TDS from your salary, your total advance tax liability for the year reduces by ₹20,000. This will be reflected when you make the advance tax payment. Example of Advance Tax Calculation Let’s assume the following example: Total Income: ₹12,00,000 Deductions under 80C, 80D, etc.: ₹1,50,000 Net Taxable Income: ₹12,00,000 - ₹1,50,000 = ₹10,50,000 Now, calculate the tax based on the income slabs for an individual below 60 years: ₹2,50,000 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500 ₹5,00,000 to ₹10,00,000: 20% of ₹5,00,000 = ₹1,00,000 ₹10,00,000 to ₹10,50,000: 30% of ₹50,000 = ₹15,000 Total Tax Payable: ₹12,500 (5%) + ₹1,00,000 (20%) + ₹15,000 (30%) = ₹1,27,500 Now, add 4% health and education cess: ₹1,27,500 × 4% = ₹5,100 Total Tax Payable: ₹1,27,500 + ₹5,100 = ₹1,32,600 Advance Tax Installment Breakdown: 1. First installment (15% by 15th June): ₹1,32,600 × 15% = ₹19,890 2. Second installment (45% by 15th September): ₹1,32,600 × 45% = ₹59,670 3. Third installment (75% by 15th December): ₹1,32,600 × 75% = ₹99,450 4. Fourth installment (100% by 15th March): ₹1,32,600 × 100% = ₹1,32,600 Important Points to Remember: Non-Payment or Underpayment: If you don’t pay advance tax or underpay it, you may be liable for interest under Section 234B and Section 234C. Interest for Late Payment: If you fail to pay the advance tax or delay the payments, you may have to pay interest on the overdue amount. This is calculated at 1% per month for each month of delay. Adjustments: If you overpay or underpay, adjustments can be made in the following installment. Conclusion: Advance tax is a method of paying taxes progressively throughout the year. To calculate it: 1. Estimate your total income and apply deductions. 2. Calculate the total tax liability. 3. Divide the liability into four installments, paying according to the scheduled due dates. By adhering to the advance tax schedule, taxpayers avoid penalties and interest, ensuring smooth and timely compliance with tax laws. If you find it difficult to calculate advance tax on your own, you may want to consult a tax professional or use online calculators provided by tax portals.
