Advance tax is referred to the tax payable on the total income of one’s earning within a year; by calculating the total income from different sources like salary, business, profession, rent, etc. Advance tax is always expected to be cleared before the end of the financial year. Advance tax can also be simplified as, ‘pay as you earn’ policy which is payable if your tax liability exceeds Rupees 10,000 in a financial year.
The income that government receives through Advance Tax helps to maintain a consistent flow of revenue throughout the year. Through Advance tax revenue, the government can incur any expenses at the given time instead of piling on a liability of dues.
Does everyone need to file for Advance Tax?
For salaried individuals, there will be no requirement to file for Advance Tax as the employers implement TDS policy, which means a deduction of taxes from total salary at the source. If the individual has other sources of income other than his/her salary then Advance Tax becomes applicable which indicates that this tax is payable even for salaried employees with extra earnings.
Besides earning from regular business or income from salary, if an assesse earns his/her income through the capital profits on shares, interest on fixed deposits, winnings from lottery or races, house property etc. then, after regulating the losses and gains, Advance Tax must be paid.
TDS is deducted on salaries by the empoyers but, advance tax is paid on the type of income that is not subjected to TDS. Entrepreneurs, corporations and self-employed individuals must pay taxes in advance because once the taxes start piling then it becomes a liability which is hard to remove.
Sources of Income that Attract Advance Tax
There are certain types of income which require an individual to pay for Advance Tax:
- Income earned through capital gains on shares.
- Interest earned on fixed deposits.
- Winnings from a lottery.
- Income earned from renting of house/flats.
Advance Tax Calculation
To determine if you should pay Advance Tax, you can calculate your earnings as follows:
- Income Calculation: Apart from the salary, calculate all the income you earn, including any agreements in progress which could add to your earnings in the future.
- Deduct the Expenses: Deduct all the expenditures, associated with the rent on the workplace, travel expenses, internet and phone bill charges etc. from the total income.
- Combine the rest of the Income: After deducting the expenditure amount from the total income, deduct the same percentage of TDS that was deducted from your salary.
- Total Advance Tax: Upon calculation, if the TDS on your income shows more than Rupees 10,000 then you will have to pay Advance Tax.
Filing for Advance Tax
The payments for Advance tax or self-assessment taxes must be done during the 15th of September, December and March. Payment must be made in installments of 30%, 30% and 40% respectively for non-corporations. Corporations are required to make the payments on the 15th of June, September, December and March.
What are the steps for Payment of Advance Tax Online?
The payment of Advance Tax can be made online via the Income Tax Department website.
The following steps need to be followed to successfully complete the payment procedure:
- Visit the official website of the Income Tax Department.
- Select Advance Tax filing form, which is Challan 280.
- Fill the form with the correct credentials, including details of the assessment year, address, phone number, email address, the name of your bank account, captcha code etc.
- After filling and submitting the form, the applicant will be redirected to the Bank’s Net Banking page for verifying the transaction. Always recheck the amount for the payment to be made.
- Once the amount of the payment has been deducted from the bank account the details along with your challan number will be sent to you.
- Always make a report of your payment by adding an additional entry under the ‘paid tax’ page.
Consequences on Late Payment of Advance Tax
An individual is required to pay an interest amount if he/she forgets to pay the Advance Tax by the first deadline. 1% interest on the defaulted amount is computed as the interest rate for every month until the tax is paid off in full. If the individual still doesn’t pay the tax by the second or third deadline, the same interest penalty will be re-applicable (1% interest).
What are the Benefits of Advance Tax?
Some of the obvious advantages of Advance Tax payment system are:
- It helps in reducing the pressure off taxpayers, as the system allows one to pay the tax in advance.
- Taxpayers do not have to stress about tax payments at the last moment.
- It eliminates the hassles of tax collection by speeding up the process.
- It aids in the government’s funds by earning interests on the collected amount.
- The Advance Tax also stops tax defaulters from escaping on tax payments.
- The management of business finances is made more stable as it provides an idea of earnings that the business has made within that year.
Refund of Advance Tax
After the assessment, at the end of the year, if The Income Tax Department finds out that the amount paid for Advance Tax is more than the amount imposed then the excess amount is refunded to the payee. To claim for refund, the taxpayer must fill and submit Form 30 within a period of one year, from the last assessment year.
Frequently Asked Questions
Q. What happens if the Advance Tax paid is more than required?
If the amount of the Advance Tax paid is higher than the required tax liability, the assesse can collect the excess amount as a refund. An interest of 6% per annum will be paid by the Income Tax department to the assesse against the excess amount if the amount is more than 10% of the tax liability.
Q. In which cases are Advance Income Tax not owed to the government?
Cases that do not require the payment of Advances Taxes include:
- Senior citizens who do not earn income through self-owned businesses.
- Cases when the additional Income Tax liability (along with TDS) does not exceed INR 10,000 for that assessment year.
Q. What happens when one does not pay Advance Income Tax?
In cases when one does not pay Advance Income Tax, he/she will be required to pay an interest rate, under section 234B and section 234C of the Income Tax Act, 1961.
Q. What is Challan 280?
Challan 280 of Advance Tax allows one to make online payments through the official website of the Income Tax Department of India. With Challan 280 one does not need to rely on Chartered Accountants or any other sources for paying taxes.
Q. What does one do after filling Challan 280?
Challan 280 should be filled correctly to pay taxes online or offline. Online forms can be submitted on the official website of the Income Tax Department while for offline submission, Challan 280 must be downloaded, filled and submitted at the registered bank.