In India, you can pay taxes by two methods. Firstly, earn income and pay the taxes at the end of a financial year according to the applicable tax slab. Alternatively, in the second method, you estimate your tax liability before-in-hand and pay your taxes in advance. The second method of tax payment is known as advance tax in India.
Here is all you need to know about advanced tax and how it is calculated:
What is an advanced tax?
Advanced tax is tax paid in advance by individuals who have income from other sources apart from salary. These could include earnings from a different profession, side-business, capital gains, fixed deposit interest, lottery, rent, etc. Also, according to Section 208 of the Income Tax Act, 1961, advance income tax is payable only when the overall tax liability is more than ₹10,000. The main objective of the advanced tax is to maintain transparency in multiple income streams and avoid any discrepancies in the payment of taxes.
Salaried individuals are not required to pay this tax because of the TDS (Tax Deducted at Source) cuts made by the employer every month. Moreover, senior citizens, without a separate profession or business, are exempt from advance income tax payment.
Who has to pay advanced tax?
In India, advanced tax is payable by the following people:
Salaried individuals, freelancers and business firms with a tax liability of more than ₹10,000 in a financial year.
Non-residential Indians who earn from India and have a tax liability of more than ₹10,000 in a year.
Professionals and business taxpayers who choose presumptive taxation option under Section 44AD of the Income Tax Act, 1961. In this case, the total advance tax is paid in one instalment on or before 15 March of the concerned financial year. These taxpayers can also pay their tax liability by 31 March.
How to calculate advance tax?
The following steps can be used to calculate your advanced tax liability:
Estimate your total income: Determine your total income from sources other than your prime salary. You will also include any ongoing agreements.
Deduct the expenses: From the income of other sources, minus any business-related expenses, like travel, telephone costs, commuting, internet, etc.
Add additional income: In the above figure, add any other earnings from sources like rent, fixed deposit interest, capital gains, etc.
Determine your tax: According to the total income, determine your tax slab and therefore, your tax liability. If it is above ₹10,000, pay your dues in advance.
That said, advance income tax is paid in phases and has separate filing dates. So, if your overall tax liability is approximately ₹1 lakh, you would be paying 15% of this amount (₹15,000) on 15 June of the financial year. Then, on or before 15 September, you will pay 45% advance tax, which is ₹45,000. But since you have paid ₹15,000 already; in the next phase, you will pay ₹30,000 as advanced tax.
Further, in the third instalment due on 15 December, you would need to pay 75% as income tax advance tax, but after adjustment, you will pay ₹30,000. In the last phase, due on 15 March of the financial year, you will have to clear 100% dues, so the remaining tax penalty of ₹25,000 is paid in this phase.
In case, you miss the deadlines for payment of advanced tax a penalty is levied. In case, the advance tax paid is less than 90% of the total due, an interest of 1% (on the default amount) will be charged every month, according to Section 234B of the Income Tax Act, 1961.
You must be very cautious of your tax liability and pay your applicable taxes in time to avoid complications.