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What is Advance Tax & How to Calculate it?

Advance Tax can be simply understood as an advance estimation of total taxable income and, thereafter, a presumptive calculation of the tax amount payable by the assesse for the relevant financial year. 

An assessee who is liable to pay advance tax is required to estimate his current income and pay advance tax thereon without having to submit any estimate or statement of income to the assessing authorities. In simpler words, it is payment of the income tax in equal parts throughout the year, rather than paying the lumpsum tax amount at the end of the year. 

Applicability of Advance Tax Liability:

Advance Tax Liability is applicable on all tax payers, whether salaried, freelancers or businesses. In case of salaried tax payers, if the employer deducts tax at source or TDS, then there is no further need of payment of advance tax. 

However, if such an assessee has any other income other than salary, then he/she is required to meet advance tax liability for such income. Such incomes may include capital gains on shares or house property, interest on investments, etc. after making appropriate deductions for losses, if any.

How to Calculate Advance Tax?

Tax can be computed on the current income (estimated by the taxpayer) at the rates in force during the financial year. Income received in the previous financial year can be taken as the taxable income for the calculation of advance tax liability. In case of businesses and professionals like doctors, lawyers, etc. resident in India, whose gross receipts or turnover of businesses is less than ₹ 2 crore per annum, they are exempted from the mandatory payment of advance tax. They have to pay 100% Advance Tax by 15th March. Such businesses are relieved from maintaining books of accounts. However, they are not allowed to deduct any business income against this business income.  

You can read the Advance Tax Due Dates  here.

FAQs on Advance Tax Liability:

Q: I am salaried professional, do I have to file for Advance Tax Liability?

A: If the employer is deducting TDS, then there is no requirement to calculate and file for Advance Tax Liability on the income derived from salary. However, if you are in receipt of income from any other source and the advance tax payable is ₹10,000 or more, then you have to file for Advance Tax Liability.

Q: I am 62 years old, hence a senior citizen. Do I have to pay advance tax?

A: In case, you don’t own and maintain a business, you don’t have to pay advance tax. However, if you are in receipt of income from business then such exemption does not apply any longer.

Q: I run a small shop and my turnover for the business is less than ₹2 crore annually. I have opted for presumptive scheme under section 44AD where my net income is calculated as 8% of the total cash receipts. I incurred some business expenses and maintain few electronic gadgets on which I wish to claim depreciation. Can I claim these deductions?

A: No. Once the business is listed under Presumptive Scheme under section 44AD, no business expenses can be allowed for deductions. In this case, you cannot claim the deductions for business expenses and depreciation on electronics.

Q: What if I declare higher or a lower income for a financial year?

A: The taxpayer can declare a higher amount for income and pay advance tax on it, accordingly. However, if he declares a lower income and pays advance tax on it, then he is mandated to maintain the books of accounts for the business and get them audited in the end. 

Q: I declared a higher income and paid advance tax accordingly. However, in the end of the year my total tax liability is less than what I have already paid. Will I get the excess amount back?

A: Yes. If the advance tax is paid in excess as compared to the total tax liability for that relevant financial year, then the amount paid in extra gets refunded from the Department’s end along with an interest @ 6% p.a. where the tax paid in excess is more than 10% of the total tax liable. 

Q: What is the penalty for missing the dates of payment of Advance Tax?

A: If a taxpayer fails to pay the tax or makes a short payment of it, then he/she is liable to pay a penalty of 1% p.m. on the defaulted amount for the following months till the complete tax payment is done. 

Disclaimer: This information is updated till 06 October 2017.

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