Understanding Advance Tax Liability in India

A Guide for Salaried, Self-Employed, and Professionals

As a taxpayer in India, it is important to understand your tax liability and fulfil it in a timely manner to avoid any interest and penalties under the Income Tax Act. Advance tax is one such component of tax liability that is applicable to not just corporates and businesses, but also to salaried individuals, pensioners, self-employed individuals, freelancers, and professionals.

What is Advance Tax Liability?

Advance tax is the estimated tax liability paid in advance during the financial year, instead of paying the entire tax amount at the end of the year. This is applicable in cases where the tax liability for the year is not expected to be fully covered by Tax Deducted at Source (TDS). TDS is the tax deducted by the employer or other parties on behalf of the taxpayer, which is then deposited with the government.

Who Needs to Pay Advance Tax?

Salaried individuals and pensioners may also be required to pay advance tax if their estimated tax liability for the year is more than Rs. 10,000 and if their TDS is not sufficient to cover the overall tax liability. This can happen in cases where the person changes jobs and does not disclose previous income at the new job, or if they have income from sources other than salary, such as interest, rent, capital gains, or any other taxable income.

Self-employed individuals, such as freelancers, professionals, and businessmen, are required to pay advance tax if their estimated tax liability for the year is more than Rs. 10,000. This is because their income may not be subject to TDS and they may have to pay taxes on their own. They need to estimate their total revenue for the year and calculate the tax liability on it. The due dates for payment of advance tax for self-employed individuals are June 15th, September 15th, December 15th, and March 15th.

Presumptive Income Scheme

Taxpayers who have opted for the presumptive taxation scheme under section 44AD or 44ADA have to pay their entire advance tax liability in one instalment on or before March 15th. They can also pay the entire amount by March 31st. The presumptive scheme is applicable to businesses and independent professionals such as doctors, lawyers, architects, etc.

Consequences of Non-Payment of Advance Tax

If a taxpayer fails to pay their advance tax on time, they may be liable to pay interest under Section 220(2) of the Income Tax Act. The interest is calculated from the due date of payment until the actual date of payment, at a rate of 1% per month or part of the month for the period of delay. The interest is calculated on the amount of tax that remains unpaid, including any advance tax, self-assessment tax, or regular tax that has been assessed but not paid by the due date.

Many taxpayers skip paying advance tax to save on professional fees but pay huge interest charges while filing their Income Tax Returns. It is advisable to consult a tax professional to estimate your tax liability and plan your tax payments accordingly to avoid any interest charges and penalties.

In conclusion, advance tax is an important component of tax liability in India that applies to a wide range of taxpayers. It is crucial to estimate your tax liability correctly and pay advance tax on time to avoid interest charges and penalties.

Seek the help of a tax professional if required and do not fall into the trap of being penny-wise and pound-foolish when it comes to tax payments.