Advance Tax: Who Needs To Pay And What Happens If You Don't

Advance tax is a critical component of the Indian tax structure in the sense that it demands companies and people to prepay their income tax in the form of instalments rather than paying it in lump sum at the end of the financial year. It takes effect when the cumulative tax liability is more than Rs 10,000 during a financial year. This system provides a steady stream of income for the government and prevents taxpayers from paying a large amount of tax while filing their returns. Failure to pay advance tax within time can lead to a charge of interest, which will increase the liability of the taxpayer.

Who Needs to Pay Advance Tax?

Advance tax is charged on all categories of taxpayers, including salaried employees, self-employed professionals, businesspersons, and freelancers. While salaried employees normally have their taxes deducted at source under the Tax Deducted at Source (TDS) system, they might still be called upon to pay advance tax if they earn other incomes, like rental income, capital gains, or interest income.

Self-employed individuals and owners, whose incomes are not to be taxed under TDS, are required to estimate their income on an annual basis and pay advance tax accordingly in instalments. Business companies of all sizes need to follow advance tax provisions depending on expected receipts. Senior citizens who are 60 years old or older and do not earn business income are exempt from advance tax payments. 

"But even if you are 60 years old or older but earning profits from intraday trading or Futures and options (F&O), and your total tax liability for the financial year exceeds Rs 10,000, you will have to pay the advance tax as your profits will be regarded as income from business", stated tax and investment expert, Balwant Jain. 

Taxpayers who have opted for the old tax regime, under Sections 44AD and 44ADA of the Income Tax Act, are required to pay the entire advance tax by a single payment by March 15 of the financial year. The old tax regime is provided to small and medium-sized businesses, as well as professionals.

Old vs. New Tax Regime: How It Impacts Advance Tax

Taxpayers (except taxpayers with income from business) have a choice between the old and new tax regimes, which impacts how they calculate their advance tax liability. The old tax regime allows a deduction under sections like 80C (investments), 80D (health insurance), and 80G (donations). As deductions reduce taxable income, the advance tax liability may be lower.

On the other hand, the new tax regime offers lower rates of tax but tightly limits the typical deductions. This results in a higher taxable income and thus a larger advance tax payment. Since advance tax is calculated based on estimated taxable income, taxpayers will need to include their preferred tax regime when paying to avoid being charged underpayment penalties.

Payment Schedule and Deadlines

Advance tax is paid in four instalments within the financial year. For individuals and firms under the normal taxation system, the due dates are as under:

• By June 15: 15 per cent of the estimated tax liability is to be paid.

• By September 15: 45 per cent of the estimated tax is to be paid (meaning, 30 per cent on top of the previous 15 per cent).

• By December 15: 75 per cent of the advance tax needs to be paid (30 per cent on top of the previous 45 per cent).

• By March 15: The entire tax amount has to be paid.

What if You Fail to Pay Advance Tax?

Default or under-default in payment of advance tax incurs monetary penalties. The Income Tax Act of 1961 imposes interest under two major sections:

1. Section 234B: Where an assessee fails to pay a minimum of 90 per cent of the total tax due before the end of the financial year, a rate of interest at 1 per cent per month is charged on the defaulting amount until payment of tax.

2. Section 234C: This applies if any of the payment dates fall overdue. In such a scenario where the assessee doesn't deposit the payable percentage on time, a 1 per cent charge for each month is added on the overdue amount for the relative period.

Jain also stated, "You can still pay the advance tax by 31st March. This will mean any advance tax paid between 15th March and 31st March will be treated as an advance tax but you will have to pay the interest for one month. But if you make a delay even if for one day in the installments of 15 per cent, 30 per cent and the rest, for example, you have to pay 15 per cent on 15th June but if you pay the same on 16th June then it will be counted as if you have paid it in September. So, you will have to pay the interest of 3 months in accordance with the 1 per cent interest levied on late payments".

Apart from interest charges, failure to pay advance tax can lead to extra tax being paid when the returns are submitted, causing financial strain if the assessee has not set aside funds for tax payment. But if a taxpayer overpays, he can claim a refund when he files his income tax return.

How to Calculate and Pay Advance Tax

To calculate advance tax, taxpayers must make an estimate of their total income taxable during the financial year on account of all the sources like salary, profits of business or profession, income from capital gains, income from house property and income from interest.

Advance tax can be paid through the income tax department's e-payment portal or at prescribed bank branches through the use of the challan system. Following the payment, the taxpayers are provided with a challan receipt, which has to be retained for future use while filing returns.

Significance of Payment Within Time 

Payment of advance tax within time keeps one in terms with the tax laws and avoids the additional interest burden of payment. It also helps to plan finances more effectively by paying the tax in various instalments instead of making a huge amount at the year-end. Apart from that, it saves from end-period tax liabilities that would destabilise the financial stability.

For individuals, firms, and professionals alike, paying advance tax in time improves credit rating and fiscal discipline. Regular tax payments make financial reports more favourable, and that helps in securing loans or raising investments.