Advance Tax
Advance tax is the income tax paid in instalments during the financial year in which the income is earned, rather than as a lump sum at year-end, as mandated by the Income Tax Act.
Definition
Advance tax, often called 'pay-as-you-earn' tax, is the mechanism under the Indian Income Tax Act, 1961, that requires taxpayers to estimate their annual income and pay income tax in quarterly instalments during the financial year itself, rather than waiting until the assessment year. Section 208 mandates that any person whose estimated tax liability for the year exceeds Rs 10,000 (after accounting for TDS credits) must pay advance tax.
The advance tax system is particularly relevant for businesses, professionals, and individuals with significant income from sources where TDS may not fully cover the tax liability, such as business profits, capital gains, rental income, or interest income from non-banking sources. For companies, advance tax is mandatory regardless of the amount. The four quarterly instalments are due by 15th June (15%), 15th September (45%), 15th December (75%), and 15th March (100%) of the financial year.
The relationship between advance tax and TDS is critical for Indian businesses. TDS deducted by payers reduces the advance tax obligation, if sufficient TDS has been deducted on your income, your advance tax liability may be nil. However, if TDS credits are insufficient to cover your total tax liability, the balance must be paid as advance tax. Failure to pay advance tax or underpayment attracts interest under Section 234B (for default in payment) and Section 234C (for deferment of instalments).
Key Points
- Mandatory for any taxpayer with estimated tax liability exceeding Rs 10,000 after TDS credits
- Paid in four quarterly instalments: 15% by June 15, 45% by Sept 15, 75% by Dec 15, 100% by March 15
- Senior citizens (60+ years) without business income are exempt from advance tax
- Companies must pay advance tax regardless of the amount of liability
- Interest under Section 234B applies at 1% per month for failure to pay at least 90% of assessed tax as advance tax
- Interest under Section 234C applies at 1% per month for shortfall in individual quarterly instalments
- TDS credits reduce advance tax liability: excess TDS may eliminate the need for advance tax entirely
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