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