What is Advance Tax? How to Calculate It and Due Dates

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  • Last Updated on 24 November, 2022

Advance Tax

Table of Contents

1. Introduction

2. What is Advance tax Payment?

3. Liability to Pay 

4. How to Calculate Advance Tax?

5. Due Dates

6. Adjustment in Subsequent Instalments 

7. How to Pay Tax in Advance?

8. Consequence of Default in Payment 

9. Notice by Assessing Officer to Pay 

10. Frequently Asked Questions

1. Introduction

It is required to be paid in the year in which the income is earned. It is ‘pay-as-you-earn’ tax scheme. It is levied by the Income Tax Department to regularise the receipt of taxes from the assessee. Assessee have to pay the taxes in advance on quarterly basis; such tax paid is called Advance Tax.

2. What is Advance Tax Payment?

It is a device to ensure a steady flow of tax revenue to government exchequer without waiting for actual crystallisation of tax liability on completion of the previous year. This scheme requires every assessee to estimate his current income and if tax liability on such estimated income exceeds the specified limit, the assessee is required to pay the estimated tax in instalments during the financial year itself. Thus, an assessee is required to pay tax as he earns and therefore this scheme is also known ‘Pay as you Earn Scheme’.

Direct Taxes Law & Practice

3. Liability to Pay

Every assessee is liable to pay advance tax if his estimated tax liability of the financial year is Rs. 10,000 or more. Thus, every assessee, irrespective of his residential status, shall be liable to pay tax in advance if tax payable during the financial year is Rs. 10,000 or more.

3.1 Exception

A resident individual is not required to pay the advance tax, if he satisfies the following conditions:

(a) He does not have any income chargeable under the head ‘Profits and gains from business or profession‘; and

(b) His age is 60 years or more at any time during the previous year.

4. How to Calculate the Payment of Tax in Advance

It is payable in respect of the ‘current income’ which is chargeable to tax in the assessment year immediately following the relevant financial year. Every income is subject to advance tax even if such income is subject to deduction of tax at source or subject to any special rate of tax.

To determine the tax payable, the assessee is required to compute the estimated income for the financial year and the tax liability thereon.

Step 1: Calculate the estimated total income of the previous year

Estimated Income and Deductions Amount
Normal income taxable as per applicable tax rate xxx
Special income taxable as per special tax rate xxx
Estimated Gross Total Income xxx
Less:
Deductions under Chapter VI-A (xxx)
Estimated Net taxable income Xxx

As per Section 2(9) of the corresponding Finance Acts, the advance tax shall be computed at the rates specified in Part III of the First Schedule. In other words, the tax rates applicable for the Assessment Year relevant to the previous year in which it is payable shall be taken into account while computing the tax on income taxable under this provision.

Example, the advance-tax payable in previous year 2022-23 shall be computed on basis of tax rates applicable for the assessment year 2023-24.

Step 2: Calculate tax on the estimated total income of the previous year.

Particulars Amount
Tax on income at normal rates xxx
Tax on income at special rates xxx
Tax on total Income xxx
Less:
Rebate under section 87A (xxx)
Tax after rebate xxx
Add:
Surcharge xxx
Tax after surcharge xxx
Add:
Health and Education Cess xxx
Gross tax liability xxx
Less:
  • MAT Credit or AMT Credit
(xxx)
  • Tax relief under Section 89
(xxx)
  • Foreign tax credit under Section 90, 90A or 91
(xxx)
Net tax liability xxx
Less: Prepaid taxes
  • TDS deducted
(xxx)
  • TCS collected
(xxx)
Total  tax liability xxx

Here, it is to be noted that anon-corporate assessee is liable to pay Alternative Minimum Tax (AMT) where tax payable by him, on total income computed as per normal provisions of the Act, is less than 18.5%[1]  (15% in case of a co-operative society[2] ) of ‘adjusted total income’. In such a case the ‘adjusted total income’ is taken as the income of such assessee and he shall be liable to pay tax at the rate of 18.5%/15% of such ‘adjusted total income’.

Similarly, a company is liable to pay Minimum Alternative Tax (MAT) where tax payable by it, on total income computed as per normal provisions of the Act, is less than 15%[1]  of ‘book profit’. In such a case the ‘book profit’ is taken as the income of the company and it shall be liable to pay tax at the rate of 15% of such ‘book profit’.

However, the provisions of AMT or MAT do not apply in certain cases.

Thus, it is equally important for an assessee to estimate his book profit or adjusted total income, as the case may be, and tax thereon while computing his advance tax liability if provision relating to MAT or AMT is applicable in his case.

The amount payable by way of tax in advance is rounded off to the nearest multiple of Rs. 10. For this purpose, any part of the rupee, consisting of paisa, is ignored. Thereafter, where such amount is not a multiple of ten, and the last figure in that amount is five or more, such amount is increased to the next higher amount which is a multiple of ten. If the last figure of such amount is less than five, the amount is reduced to the next lower amount which is a multiple of ten. Example, the tax payable of Rs. 15,493 shall round down to Rs. 15,490 and tax of Rs. 15,495.01 shall be round up to Rs. 15,500.

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5. Due dates

The advance tax shall be payable by the assessee in 4 instalments on or before the prescribed due dates as specified in below table.

Due date for payment of advance tax Tax to be payable
On or before June 15 of previous year Not less than 15% of advance tax
On or before September 15 of previous year Not less than 45% of advance tax
On or before December 15 of previous year Not less than 75% of advance tax
On or before March 15 of previous year 100% of advance tax

An assessee, who declares his business or professional income in accordance with presumptive tax scheme of Section 44AD or Section 44ADA, is not liable to discharge his advance tax liability in accordance with aforesaid instalments. He is required to discharge the whole amount of his advance tax liability on or before March 15th of the previous year. Thus, he can pay 100% of advance tax in a single instalment on or before March 15 of the previous year.

Any tax paid, on or before 31st March, shall also be treated as tax in advance paid during the financial year.

If the last day for payment of any instalment is a day on which the receiving bank is closed, the assessee can make the payment on the immediate next working day, and in such cases, the mandatory interest leviable under Sections 234B and Section 234C would not be charged[3] .

6. Adjustment in Subsequent Instalments

Where assessee has paid excessive (or vice-versa) advance tax in previous instalment, he can revise the sum payable in subsequent instalments. Thus, before payment of any instalment of advance-tax, the assessee should re-calculate his total tax liability on aggregate of following incomes:

(a) Actual income earned till the date of calculation of advance tax

(b) Income he expects to earn from the date of calculation till March 31 of that financial year

The amount to be paid as advance tax in current instalment should be calculated by multiplying the prescribed percentage to the total advance tax liability and the resultant figure should be reduced with the advance tax actually paid till previous instalment.

7. How to Pay Advance Tax Online?

It can be paid Online (electronically) or offline (through authorized bank)by submitting the details in Challan No./ITNS 280. However, with effect from April 01, 2008, it is mandatory for a Company or a person (other than a company) who is required to get his accounts audited under section 44AB to pay the taxes through online mode only.

As per the prescribed rule[4] , the electronic payment of tax can be made through internet banking facilities or through Credit/Debit cards. However, practically no payment is allowed through credit cards. Moreover payment through net banking or debit card is also available through certain banks only.

With a view to facilitate e-payment of taxes, The CBDT[5]  clarified that it is not mandatory for an assessee to make payment of taxes through his own account. He can make payment of taxes from the account of any other person. However, the challan through which payment is made must clearly indicate the PAN of the assessee on whose behalf payment is made.

Law & Practice of Income Tax by Pithisaria & Pithisaria

8. Consequence of Default in Payment

If assessee does not pay the advance tax in accordance with the provisions discussed above, he shall be liable to pay the following interest:

(a) Interest under Section 234B for default in payment of tax

(b) Interest under Section 234C for deferment of payment of tax.

9. Notice by Assessing Officer

9.1 When can AO issue notice to pay advance tax?

If any person has been assessed in any previous year by way of regular assessment and in the opinion of the Assessing Officer, such person is liable to pay advance tax, he may serve a notice of demand to such person in Form No. 28 requiring him to pay it.

9.1.1 In case of agent of non-resident

The liability of agent to pay advance tax on behalf of the non-resident principle may arise if the Assessing Officer serves him with a notice and, after hearing him, decides to treat him an agent for the non-resident principal. Once a person is held to be an agent of non-resident principal for a particular assessment year, he may be required to pay tax for that year.[6] This procedure is required to be followed for each relevant assessment year. An agent cannot be held liable to pay advance tax simply on the ground that he was assessed as an agent in the past year[7] .

9.2 Time-limit to issue notice

The notice may be issued at any time during the financial year but not later than the last day of February of the relevant financial year, specifying the amount of advance tax and the number of instalments in which such tax has to be paid.

9.3 Basis of computation of Advance Tax by AO

The Assessing Officer is required to compute advance tax liability in such a case on the basis of higher of following two incomes:

(a) Total income of the latest previous year assessed by way of regular assessment

(b) Total income disclosed in the return for any subsequent previous year

While computing the such tax liability of an individual and an HUF, the Assessing Officer shall consider his Agricultural Income of the relevant previous year Further, the Assessing Officer is also required to give due adjustment for the amount of tax deducted or tax collected at source from the income included in the current income on which advance tax is payable. However, if tax is deductible or collectible but the payer or collector has not deducted/collected it, such tax cannot be reduced from the amount estimated by the Assessing officer.

The Assessing Officer can amend his calculation and issue a revised notice of demand, if subsequent to passing an order but before March 1 of the relevant financial year, the assessee had furnished a return of income for the subsequent year or any assessment for a later year has been completed at a higher figure. In such case calculation of advance tax shall be made on the basis of the income declared in the return furnished or total income in respect of which regular assessment has been made, as the case may be.

9.4 Payment of Advance Tax Demand by Assessee

On receipt of demand notice, if assessee considers that the advance tax payable on his current income of the relevant financial year (for which notice has been issued) would be less than the demand raised in the notice, he may send an intimation to the Assessing Officer in the Form 28A electronically and pay it accordingly.

Conversely, if advance tax payable on current income of the relevant financial year is higher than the amount specified in the demand notice, the assessees should pay tax according to his estimate. The assessee is not required to send any computation, of his estimated income and advance tax, to the Assessing Officer.

If demand notice is served on the assessee by the Assessing Officer after the expiry of any of the due dates as aforesaid, the assessees should pay the appropriate amount of tax on or before such due dates which remain unexpired after the service of such notice.

9.5 Consequences for Non-payment of advance tax demand

If assessee does not pay the advance in accordance with the demand notice served by the Assessing Officer, he is deemed to be an assessee-in-default.

9.6 Credit for advance tax

Any sum paid by way of advance tax, other than penalty or interest, shall be treated as payment of tax in respect of the current income. Credit for the same shall be allowed to the assessee in the regular assessment.

Master Guide To Income Tax Act

10. Frequently Asked Questions (FAQs)

FAQ 1: I am salaried professional, do I have to file for Advance Tax Liability?

Ans: 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.

FAQ 2: I am 62 years old, hence a senior citizen. Do I have to pay advance tax?

Ans: 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.

FAQ 3: 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?

Ans: 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.

FAQ 4: What if I declare higher or a lower income for a financial year?

Ans: 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.

FAQ 5: I declared a higher income and paid tax in advance 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?

Ans: 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.

FAQ 6: What is the penalty for missing the dates of payment of Advance Tax?

Ans: 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.

Deduction of Tax at Source with Advance Tax and Refunds Books by Taxmann


References

    1. The tax rate shall be 9% if the assessee is located in an International Financial Services Centre (IFSC) and derives income solely in convertible foreign exchange.
    2. The Finance Act, 2022 reduces the rate of AMT in case of a co-operative society from 18.5% to 15%, w.e.f assessment year 2023-24.
    3. Circular No. 676, dated 14-1-1994.
    4. Rule 125 of the Income-tax Rules, 1962.
    5. Circular No. 5/2008, dated 14-7-2008.
    6. Premier Automobiles Ltd. v. ITO[1970] 76 ITR 1(SC).
    7. ITO v. Tata Engineering & Locomotive Co. Ltd. [1969] 71 ITR 457 (SC).

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