What is Advance Tax?
Advance Tax: The "Pay-as-You-Earn" Scheme
What is Advance Tax?
Advance Tax refers to the payment of a part of your taxes before the end of the financial year. Instead of a lump-sum payment at the time of filing your tax return, the Income Tax Act requires you to estimate your income and pay taxes in installments as you earn.
Applicability: Under Section 208, every person (salaried, freelancer, or business) whose estimated total tax liability for the year—after deducting TDS/TCS—is ₹10,000 or more, is liable to pay Advance Tax.
Exemption: Resident Senior Citizens (aged 60 years or above) who do not have any income under the head "Profits and Gains of Business or Profession" (PGBP) are exempt from paying Advance Tax.
Due Dates and Rates for Advance Tax
| Installment | Due Date | Cumulative Amount Payable |
|---|---|---|
| 1st Installment | On or before 15th June | 15% of total tax liability |
| 2nd Installment | On or before 15th September | 45% of total tax liability |
| 3rd Installment | On or before 15th December | 75% of total tax liability |
| 4th Installment | On or before 15th March | 100% of total tax liability |
Interest for Defaults and Delays
Failure to pay the required amount by the due dates attracts interest. The following sections of the Income Tax Act define these penalties:
1. Section 234C: Interest for Deferment of Advance Tax
This interest is levied if the individual installments paid are less than the prescribed percentages mentioned in the table above.
- Rate: 1% per month (Simple Interest) or part of a month.
- Duration: Generally charged for a period of 3 months for each of the first three installments and 1 month for the last installment.
- Buffer Rule: No interest u/s 234C is charged if the shortfall in the first installment (June) is up to 12% or the second installment (Sept) is up to 36% of the total tax due.
2. Section 234B: Interest for Default in Payment of Advance Tax
This interest kicks in after the financial year ends if the total tax paid by March 31st is less than 90% of the assessed tax.
- Rate: 1% per month (Simple Interest) or part of a month.
- Duration: Calculated from April 1st of the Assessment Year until the date of determination of income (or actual payment).