Paying taxes can be confusing, tiresome, and frustrating. This article seeks to provide readers with guidance on what advance tax is, how to calculate it, and the general intricacies that surround its functioning.
What is advance tax?
Advance tax refers to the tax to be paid in anticipation of the income to be earned in a particular financial year. This means that it is paid prior to the income having been earned. It replaces a lump-sum payment made at the end of the year. Advance tax is to be paid in installments as per the due dates decided by the Income Tax Department.
Ordinarily, when applied, this tax is to be paid while the income is being earned. However, keeping in mind the tax provisions of this form of tax, taxpayers are required to estimate their income for the entire year. Based on the figure arrived at, tax is paid out at specific intervals of time. Taxpayers must estimate their income and then calculate the approximate tax applicable to it. This will then allow them to ascertain whether or not they need to pay advance tax and if so, what amount is meant to be paid.
How to calculate advance tax –
Advance tax expected to be paid is calculated by making use of the following mechanisms –
Step 1 Income tax on estimated total income - relief under section 87A (if any) = Income tax after relief u/s 87A.
Step 2 Income tax after relief u/s 87A + surcharge on the estimated income = Tax liability
Step 3 Tax liability + education cess + SHEC = Total tax liability
Step 4 Total tax liability – TDS = Advance tax liability
An example of an advance tax payment –
Consider the following example which focuses on Atisha who is a freelancer earner whose income comes from professional photography. By Atisha’s estimate, he has the following expenses and earnings during the financial year –
- His annual gross receipts amount to INR 20,00,000.
- Atisha estimates his expenses to amount to INR 12,00,000.
- He has a PPF account in which he has invested INR 40,000 during the FY.
- LIC premiums paid by him amount to INR 25,000.
- Medical insurance premiums paid by him amount to INR 12,000.
- Professional receipts paid have to have TDS applied to them which he anticipates being INR 30,000.
- He also has a fixed deposit which has an estimated interest amounting to INR 10,000.
Based on these figures his advance tax payable would amount to the following –
- Income from photography profession = Gross receipts – expenses i.e., 20,00,000 -12,00,000 = 8,00,000
- Income from other sources = interest from fixed deposit i.e., 10,000
- Gross total income = income from photography + income from other sources i.e., 8,00,000 + 10,000 = 8,10,000
- Deductions applicable under section 80C = contribution to PPF + LIC premium + deductions under section 80D i.e., 40,000+25,000+12,000= 77,000
- Total income = gross total income – deductions applicable under section 80C i.e., 8,10,000- 77,000 = 7,33,000
- Tax payable in advance = (Tax payable + education CESS @ 4%) – TDS i.e., (59,100+2,364)– 30,000 = 31,464
Based on the advance tax payable arrived at, the following payment method would be applicable to Atisha -
Who should pay advance tax?
Advance tax is payable by a number of individuals some of whom have been mentioned below –
- Businesses, freelancers, and salaried employees who have a tax liability totalling INR 10,000 or more in a given financial year, advance tax is applicable. This form of tax is to be paid by taxpayers as well as salaried individuals, freelancers, and businesses. Senior citizens – classified as 60 years or older who are not responsible for running a business are exempt from having to pay this form of tax.
- Businesses that have selected presumptive income – Taxpayers who have selected presumptive taxation which is available under section 44AD are required to pay their advance tax in its entirety (i.e., in one lump-sum payment) on or prior to March 15. These individuals are also entitled to pay out all their tax dues prior to March 31.
- Professionals with a presumptive income – Several individuals may choose to operate independently in their professions and may include architects, doctors, and lawyers among others. These professionals fall under the presumptive scheme mentioned in section 44ADA. These professionals are required to pay their advance tax liability in its entirety (i.e., in one installment) in or prior to March 15. They are also entitled to pay this amount by March 31.
Due dates for the payment of advance tax –
For FY 2021-22, individual and corporate taxpayers have the following due dates –
- On or prior to June 15: 15% of advance tax
- On or prior to September 15: 45% of advance tax – advance tax already paid
- On or prior to December 15: 75% of advance tax – advance tax already paid
- On or prior to March 15: 100% of advance tax – advance tax already paid
Taxpayers who fall under the presumptive taxation scheme specified under sections 44AD and 44ADA as a business income are required to pay 100% of advance tax on or prior to March 15.
Which forms are required in advance tax?
The most important form required to be filled and submitted prior to the mentioned due date is challan # ITNS 280. This form requires the following information to be filled out –
- PAN information – This must be carefully copied onto the form such that your tax is deposited to you and not someone else.
- Assessment year – Choose the appropriate assessment year for which you need to pay taxes as this form is being sent out in advance in anticipation of the upcoming financial year.
- Type of payment selected – You must select the appropriate form of payment. Tax paid for the same year indicated in the estimated income constitutes an advance tax. Conversely, if the tax is paid once the financial year ends, the tax paid would constitute self-assessment tax.
Once this payment is made, a Challan identification number (or CIN) will be sent to your verified mobile number or email address. This number is very important to safeguard as it will be used when you fill out your income tax return. Online payments made via ITNS 280 can be verified via the IT department on hand.
With the aid of the tools provided in this article, readers are now armed with the knowledge to better tackle their advanced taxes such that they can rest easy.
Disclaimer: Readers are requested to consultant professional tax consultant and obtain independent advice before taking any decisions having income tax implications.