As the name suggests, it refers to paying a part of your yearly taxes in advance. Advance tax is the tax payable on total income of the year earned from different sources including salary, business, profession, rent, etc. The tax is supposed to be paid before the end of the financial year.
Advance tax is also known as ‘Pay as you earn’ scheme. The tax is payable if your tax liability exceeds Rs.10,000 in a financial year. The tax should be paid in the same year in which the income was received.
i. Applicability of Advance Tax.
Salaried individuals need not pay advance tax as they already subjected to TDS by the employer. Advance tax is applicable to individuals who earn income from sources other than salary. If a salaried individual earns income from other sources, then they have to pay advance tax too.
Senior citizens, who are 60 years or older, and do not run a business, are exempt from paying advance tax.
Listed below are some of the income sources which attract advance tax:
i. Income received via capital gains on shares
ii. Interest earned on fixed deposits
iii. Winnings earned from a lottery
iv. Rent or income earned from house property
v. Profits and gains from business or profession.
ii. How to do Calculation of Advance Tax?
An individual can calculate advance tax on their own and determine if they have to pay advance tax.
Listed below are the steps to calculate advance tax:-
· Determine the Income: Determine the income you receive. It’s important to include any ongoing agreements that might pay out later.
· Minus the Expenses: Deduct eligible expenses from the income. You can deduct expenses related to your work (freelancing) such as rent of the workplace, travel expense, internet and phone costs.
· Total the Income: Add up other income that you might receive in the form of rent, interest income, etc & calculate the tax considering the slab rates. Reduce the amount of TDS deducted. The balance is tax payable.
· Total Advance Tax: If the tax payable as calculated above exceeds Rs.10,000 then advance tax should be paid in 4 installments.
We will explain the calculation by way of an example: -
Ajay is a freelancer earning income from the profession of interior decoration. For the FY 2019-20, Ajay estimates his annual gross receipts at Rs 20,00,000. Ajay estimates his expenses at Rs.12, 00,000. Ajay has deposited Rs 40,000 in PPF account. Ajay has also paid Rs 25,000 towards LIC premium. Further, Ajay has paid Rs 12,000 towards medical insurance premium. The professional receipts of Ajay are subject to TDS. Ajay estimates a TDS of Rs 30,000 on certain professional receipts for the FY 2019-20. Besides professional receipts, Ajay estimates an interest of Rs 10,000 on fixed deposits held by him. Ajay’s advance tax liability would be as below:
iii. How to pay Advance Tax – Online?
Tax is required to be paid if the tax liability, after deducting prepaid taxes like TDS, relief is Rs. 10,000/- or more.
Below given is the procedure to pay tax online :
1) Visit the URL https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp and select challan number ITNS 280.
2) Select Tax Applicable (0021) Income-Tax (Other Than Companies).
Select (100) Self-Assessment Tax as type of payment.
Select the mode of payment and the bank through which the payment has to be done.
Enter your Pan number
Select Assessment Year (take precaution here and re-confirm your selection).
Fill your contact details.
Enter captcha code and click on proceed.
3) Verify the details entered and click on the button “Submit to the bank”.
4) Log in your retail/personal net banking account to make the payment.
5) Enter the total tax amount in the field basic tax and click on the button Submit/Make payment.
6) After few moments of tax payment you get challan counterfoil with bank details - BSR code, Challan number, Challan Date and Challan amount. Please keep it safe for future reference.
Due Dates for payment of Advance Tax:
FY 2019-20 for both individual and corporate taxpayers
For taxpayers who have opted for Presumptive Taxation Scheme under section 44AD & 44ADA – Business Income
Penal interest when advance taxes are not paid
If you do not pay advance tax or payments are not as per instalments, penal interest may apply:
Interest under section 234B – Penal interest as per rules of section 234B has to be paid along with tax dues when any one of these is true for you
· You tax liability for the financial year is more than Rs. 10,000 and you did not pay any advance tax, or
· You paid advance tax but advance tax paid is less than 90% of 'assessed tax’.
In any of the above cases, interest under section 234B shall be applicable. Interest is calculated @ 1% on assessed tax less advance tax. Part of a month is rounded off to a full month. The amount on which interest is calculated is also rounded off in such a way that any fraction of hundred is ignored.
Interest under section 234C – Even though your advance tax may have been paid in full, interest under section 234C may still apply if these have not been paid as per percentage due on instalments i.e. 30% on 15th September, 60% on 15th December and 100% on 15th March. A shortfall in instalments results in penal interest under section 234C. Except where shortfall is due to underestimation or failure to estimate amount of capital gains AND the dues are paid in full in the next instalment or if no instalment is due, you pay them before the end of the financial year. Interest calculations are similar to above.
What to do if you have missed the deadline of 15th March
• Pay your tax dues as soon as possible to minimise penal interest, do not wait until it is time to file your tax returns. • If your advance tax shortfall is due to capital gains on shares or ESOPs where gains were earned post 15th March, you can avoid penal interest under section 234C by paying all your taxes in full before 31st March. • Starting financial year 2016-17, advance tax instalments have been made same for both individuals and corporates i.e. by 15th June pay 15%, by 15th September pay 45%, by 15th December pay 75% and by 15th March, 100% of taxes must be paid. So in the next financial year, plan in advance and remember to pay timely instalments.
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