What is advance tax and why do I need to pay it?

Advance tax is paying your income tax in installments throughout the financial year instead of a lump sum at the end. It applies to income not subject to TDS and ensures a steady revenue flow for the government while preventing a large tax burden for taxpayers.

Who is required to pay advance tax?

If your estimated tax liability (after considering TDS) for the financial year exceeds ₹10,000, you are liable to pay advance tax. This includes self-employed individuals, business owners (sole proprietors, partners, directors), and companies.

How do I calculate my advance tax liability?

Estimate your income for the entire financial year, deduct eligible deductions and exemptions, apply the applicable income tax rates to calculate your tax liability, and subtract any TDS already deducted. If the remaining amount exceeds ₹10,000, that's your advance tax liability.

What are the deadlines for paying advance tax?

The deadlines are: 15th June (at least 15%), 15th September (at least 45%), 15th December (at least 75%), and 15th March (100% of estimated advance tax). Taxpayers under the Presumptive Taxation Scheme (44AD/44ADA) must pay the entire amount by 15th March.

How can I pay my advance tax?

You can pay advance tax online through the Income Tax e-filing portal or offline through designated banks. The online method is generally preferred for its convenience.

Avoid Penalties: A Practical Guide to Advance Tax for Businesses

Understanding Advance Tax for Your Business

As a business owner, you're likely aware of the different taxes you need to pay. One vital aspect is advance tax, which often gets overlooked or misunderstood. This guide aims to clarify what advance tax is, who needs to pay it, how to calculate it. Also, how to make sure timely compliance.

What is Advance Tax?

In fact, Advance tax is essentially paying your income tax in installments throughout the financial year, rather than in one lump sum at the end. It applies to income that isn't subject to Tax Deducted at Source (TDS). This ensures a steady flow of revenue for the government and prevents taxpayers from facing a large tax burden at the end of the year.

Who Needs to Pay Advance Tax?

In fact, The primary rule is that if your estimated tax liability (after considering TDS, if any) for the financial year exceeds ₹10,000, you are liable to pay advance tax. This applies to:

Self-employed individuals: Professionals like doctors, lawyers, consultants. Also, freelancers.
Business owners: Sole proprietors, partners in a partnership firm. Also, directors in a company.
Companies: Both private and public limited companies.

So, It's important to note that even if your income is mostly from salary, you might still be liable for advance tax if you have income from other sources (like capital gains, rent, or business income) that isn't subject to TDS and pushes your total tax liability above ₹10,000.

Calculating Your Advance Tax Liability

Calculating advance tax involves estimating your income for the entire financial year and determining the tax payable on that income. Here's a step-by-step method:

Step 1: Estimate Your Income

This is arguably the most challenging part. You need to project your business income, capital gains, rental income. Also, any other sources of income for the entire financial year. Review past financial performance, current market trends. Also, any anticipated changes in your business to arrive at a reasonable estimate.

Step 2: Calculate Your Total Taxable Income

Once you have your estimated gross income, deduct any eligible deductions and exemptions under the Income Tax Act. This includes deductions under sections like 80C, 80D, 80G, etc. Accurate deduction planning is vital for minimizing your tax liability.

Step 3: Figure out Your Tax Liability

You see, Apply the applicable income tax rates to your total taxable income to calculate your tax liability. Remember that tax rates may vary depending on your income slab and the type of taxpayer (individual, firm, or company). Make sure to use the correct assessment year rates. For companies, the rates are different and also depend on turnover.

Step 4: Account for TDS

If any tax has already been deducted at source (TDS) from your income (e.g., from payments received from clients), subtract the TDS amount from your total tax liability. This is the amount you need to pay as advance tax.

Step 5: Verify against ₹10,000 Threshold

If the remaining tax liability after accounting for TDS exceeds ₹10,000, you are liable to pay advance tax.

Sample Calculation:

So, Let's say you estimate your business income for the financial year to be ₹8,00,000. You also have ₹50,000 in rental income and ₹20,000 in interest income. Your eligible deductions under different sections amount to ₹1,50,000. TDS has already been deducted from your rental income, amounting to ₹5,000.

Gross Income: ₹8,00,000 + ₹50,000 + ₹20,000 = ₹8,70,000
Total Taxable Income: ₹8,70,000 - ₹1,50,000 = ₹7,20,000
Tax Liability (assuming applicable tax rates): Let's say this comes out to ₹60,000.
Advance Tax Payable: ₹60,000 - ₹5,000 (TDS) = ₹55,000

Since ₹55,000 is greater than ₹10,000, you are liable to pay advance tax.

Advance Tax Payment Schedule

The advance tax payments are usually made in installments as per the following schedule:

15th June: On or before 15th June, pay at least 15% of the estimated advance tax.
15th September: On or before 15th September, pay at least 45% of the estimated advance tax (inclusive of the amount already paid).
15th December: On or before 15th December, pay at least 75% of the estimated advance tax (inclusive of the amount already paid).
15th March: On or before 15th March, pay 100% of the estimated advance tax (inclusive of the amount already paid).

Note: For taxpayers opting for the Presumptive Taxation Scheme under Section 44AD or 44ADA, the entire advance tax amount is to be paid on or before 15th March.

How to Pay Advance Tax

You see, Advance tax can be paid online through the e-payment portal of the Income Tax Department or offline through designated banks. The online method is most of the time preferred for its convenience and ease of tracking.

Visit the Income Tax e-filing portal.
Go through to the e-Pay Tax section.
Select the assessment year for which you are paying advance tax.
Choose the type of payment as 'Advance Tax'.
Select your mode of payment (net banking or credit/debit card).
Fill in the required details and make the payment.
Download the challan as proof of payment.

Consequences of Non-Payment or Late Payment

Failing to pay advance tax or delaying payments can attract interest under Sections 234B and 234C of the Income Tax Act.

Section 234B: Interest is levied if you fail to pay advance tax or if the advance tax paid is less than 90% of the assessed tax. The interest is calculated at 1% per month or part of a month from the 1st of April of the assessment year until the date of payment.
Section 234C: Interest is levied if you defer paying advance tax as per the prescribed installments. The interest rate is 1% per month or part of a month on the shortfall in each installment.

Avoiding Penalties

To avoid penalties, make sure that you:

Accurately estimate your income for the financial year.
Pay advance tax on or before the due dates.
Keep proper records of your advance tax payments.
Regularly review your income and adjust your advance tax payments accordingly.

Tips for Effective Advance Tax Planning

Here are some tips to help you plan your advance tax in a way that works:

Keep accurate financial records: Keeping track of your income and expenses throughout the year will help you estimate your income more accurately.
Review your income regularly: Don't wait until the last minute to estimate your income. Review your income on a quarterly basis and adjust your advance tax payments if needed.
Seek professional advice: If you are unsure about any aspect of advance tax, consult a tax professional. They can provide personalized advice and help you work through the complexities of tax laws.
Use online resources: The Income Tax Department's website and other online resources offer valuable information and tools to help you calculate and pay advance tax.

Conclusion

Understanding and complying with advance tax regulations is vital for business owners to avoid penalties and continue financial stability. By accurately estimating your income, paying advance tax on time. Also, looking for professional advice when needed, you can make sure a smooth and compliant tax journey. Remember, proactive tax planning is key to financial success.