What is Advance Tax, and How is it Calculated?

If you have earnings apart from salary, then as per the income tax norms, you are liable to pay advance tax. You need to pay this tax on earnings received from lottery winnings, capital gains on shares, rent, and fixed deposits, among other sources. Advance tax in India is paid online or offline through specific banks.

Let us break it all down in a simple way through this blog. Keep reading!

Advance Tax Meaning

Before moving ahead, you need to have proper clarity behind the concept of advance tax. Advance tax, also known as “pay-as-you-earn” tax, is the tax you pay before the end of the financial year on your estimated income. It is payable on the income earned from various sources, including salary (if the employer does not deduct the Tax Deducted at Source (TDS); and income from profession, business, and rent, among others. Instead of waiting till the last moment, the government wants you to clear your tax dues in installments. This helps them keep a steady cash flow and ensures that you do not end up with a huge tax burden at the end of the year.

Think of it like this: If you order food online, you sometimes pay in advance rather than paying at the time of delivery. Similarly, in taxation, if your estimated tax liability for the year is more than ₹10,000, you must pay it in advance.

Who Should Pay Advance Tax?

Not everyone has to worry about advance tax. However, if your annual tax liability exceeds ₹10,000, you are required to pay it. Here is an explanation of who needs to pay this tax:

Salaried Individuals

If you are a salaried employee, your employer already deducts TDS (Tax Deducted at Source) from your salary. But if you have other sources of income like freelancing, rental income, interest, or capital gains, you might have to pay advance tax on those earnings.

Freelancers

Freelancers have no employer to deduct TDS, which means they need to calculate and pay their taxes on their own. If your estimated income tax is over ₹10,000 in a financial year, you must pay advance tax.

Businesses

Business owners, including sole proprietors and partnerships, are required to pay advance tax on their profits. If you are running a business, you will need to estimate your annual income and pay tax accordingly.

Senior Citizens

If you are above 60 years old and do not have income from a business, you do not have to pay advance tax. But if you have business income, the advance tax rule applies.

Presumptive Income for Professionals

Self-employed professionals like doctors, lawyers, and consultants who are covered under presumptive taxation (Section 44AD and 44ADA) are required to pay advance tax.

Advance Tax Due Dates For FY 2024-25

The due dates for paying advance tax for FY 2024-25 for both individual and corporate taxpayers are as follows:

table

Steps to Pay Advance Tax Online

You can pay online advance tax through the digital facility offered by the Income Tax Department. Follow the below-mentioned steps to make an online payment:

• 1. Visit the e-filing portal of the Income Tax Department of India.
• 2. Click on the ‘e-Pay Tax’ option under the ‘Quick Links’ section or search for ‘e-Pay Tax’ in the search bar.
• 3. Enter your PAN, confirm it, and input your mobile number, then click ‘Continue.’
• 4. Enter the OTP received on your mobile and proceed.
• 5. Select ‘Income Tax’ and click on ‘Proceed.’
• 6. Choose ‘Assessment Year’ as 2025-26 and ‘Type of Payment’ as ‘Advance Tax (100)’, then continue.
• 7. Then, enter your tax details.
• 8. Select a payment method and your bank, then press ‘Continue.’
• 9. Review the challan details and click ‘Pay Now.’ Edit if needed.
• 10. Upon successful payment, an acknowledgment will be displayed. Save the receipt, including the BSR code and challan serial number, for tax return filing.

What is Advance Tax Late Payment Interest?

If you fail to pay advance tax on time, you will be charged interest under Sections 234B and 234C:

table

How to Calculate Advance Tax?

You do not need a professional to calculate your advance tax, as you can do the needful independently. You just need to follow the below-mentioned steps:

• Estimate the Income

Calculate the income you receive except the earnings from your salary. Also, include any agreements which may be paid later.

• Deduct the Expenses

Subtract all your expenses from the income; these include work-related costs such as phone/internet bills and travel costs, among others.

• Calculate the Total Income

Add up income, which you might earn from interest or rent; you need to deduct the TDS from your salary.

• Calculate the Advance Tax

In case your tax liability exceeds ₹10,000, you will be liable to make a payment for advance tax.

Calculate Advance Tax – Example

Here is an illustration to help you understand the calculation of advance tax in a better manner. Rahul is a freelancer working as a graphic designer. For the financial year 2024-25, he estimates:

• Gross receipts: ₹18,00,000
• Expenses: ₹10,00,000
• Investment in PPF: ₹50,000
• Life Insurance Premium Paid: ₹20,000
• Medical Insurance Premium Paid: ₹15,000
• TDS deducted on professional income: ₹25,000
• Interest earned from fixed deposits: ₹12,000

Now, the income calculation for advance tax would be:

table

Note:

• This calculation follows the old tax regime, as Rahul benefits from deductions under Sections 80C & 80D.
• If the net tax liability is ₹10,000 or less after TDS adjustment, advance tax payment is not required.

What Will Happen If You Miss the Deadline?

If you forget to pay your advance tax by the end of the first deadline, then you will have to pay interest. The interest will be computed as 1% on the defaulted amount for each month until the outstanding amount has been paid. If you do not pay by the second or third deadline, the same interest penalty will apply to you. It is also important to know the deadlines for GST (Goods and Services Tax) and other tax-related information to avoid such penalties in future.

FAQs on Advance Tax