Advance tax payment is a way for people to pay some of their taxes early in the financial year. The fact that the payment is made in stages makes it similar to a tax EMI. This method makes sure that taxes are paid over time instead of all at once. To get the most out of this system, users need to understand all of its components.
To avoid fines, you must know when to pay your taxes ahead of time. Also, the right amount of tax to be paid should be figured out ahead of time. Knowing the requirements for qualifying can help you determine if you need to pay. Let’s understand what advanced taxes are in detail.
Who Should Pay The Advance Tax?
Advance tax is a way for people to pay their expected tax bill over time, similar to making payments before the end of the financial year. So, there isn’t a big tax bill at the end of the year. Next, let’s discuss who is required to pay advance tax. The list includes:
Salaried Individuals
Employers deduct tax (TDS) from the salaries of most people who receive an income. They may still have to pay advance tax, though, if they make extra money from sources such as rent, interest, capital gains, or side projects. After deducting TDS, if the total tax due exceeds ₹10,000 for the financial year, advance tax must be paid.
The payment is due on specific dates, and if you pay on time, you won’t have to pay any fine. Individuals who receive a salary and pay the correct amount of TDS can relax. However, individuals who earn extra income should calculate their taxes early and set aside funds to cover the advance tax.
Freelancers
Freelancers who work for themselves typically do not have TDS deducted from their pay. In other words, they have to calculate and pay their taxes. They have to pay their expected tax if it is more than ₹10,000 for the whole year.
Since freelancers’ income isn’t always steady, it’s essential to keep track of all their tasks, fees, and costs. You can avoid extra interest charges by calculating correctly and making timely payments. Keeping track of bills also makes filing at the end of the year much easier and less stressful.
Businesses
If a business estimates it will owe more than ₹10,000 in taxes for the year, it needs to pay taxes in advance. This is applicable for small shops, partnerships, and large companies. Some small businesses can pay all of their taxes at once in March instead of every three months because they use special tax plans.
When you pay on time, you avoid fees and can better control your cash flow. It also makes the last tax payment easier and less stressful at the end of the year. It’s just a way to keep up with your tax payments while running a business.
Senior Citizens
People over 60 are exempt from paying advance tax if their only income source is pensions, savings interest, or other sources from which tax has already been deducted. If they make money from a business or job, however, they need to follow the same advance tax rules as everyone else.
This break is meant to help retired people who live on a set income. Still, seniors who make money from side jobs or consulting must figure out their yearly taxes and pay on time to avoid fines. To determine if advance tax is due, you need to consider the type of income.
Presumptive Income for Professionals
Under an assumed plan, doctors, lawyers, experts, and builders can choose a more straightforward method to calculate their taxes. Instead of providing specific reports, they claim to have made a profit equal to a set portion of their total income.
If they use this way, they don’t pay in four parts; by March 15, they just pay the full advance tax. This makes paying taxes easy, but you still have to do it on time. Taxpayers might have to pay more interest if they miss the deadline.
Read More: What Is Self-Assessment Tax And How Does It Work?
How is advance Tax calculated?
It is important to plan and pay your taxes ahead of time and avoid penalties or overpayments. Estimating your yearly income and paying your tax in stages before the end of the financial year helps you determine your advance tax. Here is an easy, step-by-step guide to figure out how much tax you need to pay:
Figure Out the Gross Total Income
Add up all of your income, such as salary, business or job, cash gains, rental income, and other sources. This is your Gross Total Income (GTI), which is the amount you use to start calculating your advance tax.
Subtract Deductions
Take qualified withdrawals from your GTI under sections like 80C, 80D, and 80E. The amount left over after these reductions is your Net Taxable Income. This number helps determine the total amount of tax you owe.
Apply Tax Rate
Find out how much tax you have to pay on your Net Taxable Income by using the income tax slab rate that applies to your situation. This shows you how much tax you owe for the whole year, without any TDS or TCS.
Subtract TDS/TCS
Take the amount of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) that you have already paid and subtract it from your total tax due. The remaining amount is the advance tax that you need to pay by the due dates.
advance tax
Read More: Understanding the Benefits of Income Tax Return (ITR) Filing
Why Is Advance Tax Important?
Not only is it the law, but paying your taxes early is also a good financial move. Spreading out tax payments over the year can help individuals and companies better manage their finances, stay in compliance, and avoid stress at the end of the financial year.
Better Financial Planning
Advance tax allows individuals to pay their taxes throughout the year, rather than in one lump sum at the end of the year. This helps better manage cash flow. When funds are spread out, people and businesses can plan their spending more effectively. Overall, it makes paying taxes every year significantly easier.
Follow the Law
If you think your annual tax bill will be more than ₹10,000, you have to pay it in advance. You are in line with income tax rules as long as you meet this condition. By following the rules, you lower the chance of getting notices, reports, or legal problems. Not only that, but it also shows that you pay on time, which is suitable for future business deals.
Staying Away From Penalties
If you pay your taxes early, you don’t have to pay interest and fines on taxes that aren’t paid on time. If you don’t pay these fines, they can add a lot to your total tax bill. Consistent payments drive goal achievement and reduce unnecessary costs. It also shows that you are careful with their money and follow the law.
Predictable Revenue for the Government
Advance tax ensures the government has a steady flow of money throughout the year. This constant flow of cash helps the government make reasonable budgets and plans for spending. People gather money to build things, help others, and plan new areas. Taxpayers’ regular payments directly help keep the government’s finances stable.
Encourages Financial Discipline
Regularly paying advance tax promotes keeping a good record of income and spending. It helps people better understand their earnings and tax obligations. This practice allows people to improve their budgeting skills and manage their money more efficiently. Over time, it makes people more aware of their financial situation and upcoming tax responsibilities.
Reduced Year-End Burden
Taxpayers avoid making a large payment at the end of the year by paying in stages. This is especially helpful for businesses and self-employed individuals. It keeps things going smoothly and reduces financial stress. In the end, it makes the end of the fiscal year easier to manage and less stressful.
What Are The Critical Dates For Advance Tax?
Pay advance tax in four instalments before the fiscal year ends: June 15, September 15, December 15, and March 15. The Income Tax Department sets these dates, and if you don’t meet any of them, you may have to pay a fine. The amount that hasn’t been paid will have interest added to it every month until it’s paid off.
Which Forms Are Required For Advance Tax?
Taxpayers must use the Challan No. ITNS 280 by the due dates given to pay the advance tax. Complete this form with accurate information to guarantee the payment is processed correctly and identified for the intended financial period.
PAN Details
Be very careful to enter the correct Permanent Account Number (PAN) on the form. A mistake could result in the tax amount being sent to another user’s account, leading to delays and complicating your tax records.
Assessment Year
Choose the correct assessment year based on the period for which you are paying tax. As the advance tax is for the next fiscal year, consistency is essential to make sure that the money goes to the right place.
Type of Payment
Select the payment method according to the timing and purpose of your transaction. Taxpayers make advance tax payments throughout the financial year based on their projected income. Taxpayers make self-assessment tax payments after the financial year ends.
A Challan Identification Number (CIN) will be given to you after the payment is made. You need to write this down and use this CIN when you file your income tax return. Ensure that the IT staff has received the payment made online through ITNS 280.
What Is The Interest On Late Payment Of The Advance Tax?
People need to pay their taxes ahead of time when they are due. According to Section 234B, you need to pay at least 90% of all taxes by March 31 as advance tax or TDS/TCS. If you don’t pay your taxes ahead of time, you will have to pay interest at 1% on the amount you owe.
Conclusion
Paying income taxes correctly means that every person needs to understand and handle advance tax. It helps you avoid legal trouble and unnecessary fines. You can spread out the cost of your taxes over the year by paying them in instalments. This method makes it easier for individuals and businesses to handle their cash flow. Not having to worry about a big payment at the end of the year is also a plus.
The first step to effective tax planning is to make an accurate estimate of your income. Reviewing your tax payments can help you stay on top of your responsibilities. Overall, planning your taxes ahead of time enables you to keep better track of your money and be more stable in the long run.
FAQs
1. What Is The Due Date for the Advance Tax Payment?
Pay advance tax in four instalments before the fiscal year ends: on June 15, September 15, December 15, and March 15. If you do not pay your advance tax on time, you will incur a 1% monthly interest charge.
2. What Is The Rule Of Advance Payment?
Advance payment is a prepayment method, where a buyer can pay money to the payee before receiving the goods or services.
3. Is the Advance Tax Refundable?
You can’t get your advance tax back. If you paid more in taxes than you owed, you can receive the difference back as a refund. When you file your income tax return for the relevant financial year, you can make this claim.
