Synopsis: In this article, we will be looking into what advance tax is and how the penalty traps affect individuals without their knowledge. Advance tax is paying your income tax in advance, before the financial year ends rather than all at once during filing.
Almost similar like EMIs but for taxes where instead of lump-sum payment in March or July, you spread your tax liability across the year in four scheduled instalments. The due dates for advance tax payment in India are:
- 15th June – 15% of the tax liability
- 15th September – 45% of the tax liability
- 15th December – 75% of the tax liability
- 15th March – 100% of the tax liability
Who needs to pay advance tax?
Any person whose total tax liability for the year exceeds INR 10000 after accounting for TDS is required to pay advance tax. This applies to:
- Freelancers and consultants whose clients don’t deduct TDS or deduct only partially
- Business owners and self-employed professionals
- Salaried individuals who have additional income from rent, capital gains, interest or investments.
- Investors who earn returns from stocks, mutual funds or crypto.
- The only people exempt are the senior citizens aged 60 and above who do not have any income from business or profession.
Real-life example
Priya is a UX designer working as a freelancer. Her annual income is INR 12 lakhs. Her clients pay her directly, with no TDS deduction. Her estimated tax liability for the year comes to approx. INR 1.5 lakhs. Since it exceeds INR 10000, priya must pay advance tax in four instalments:
- 15th june – 15% – INR 22,500
- 15th September – 45% – INR 52,500
- 15th December – 75% – INR 37,500
- 15th march – 100% – INR 37,500
- Total paid – 1.5 lakhs
NOTE: If priya skips all four instalments and pays everything in July during ITR filing, she will owe interest penalties on top of original tax dues.
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What happens if you don’t pay advance tax?
Skipping advance tax leads to paying interest as penalty under the two sections of income tax act:
Section 234B: When you have paid less than 90% of your total tax liability by 31stMarch. Interest is charged at 1% per month on the shortfall, calculated from 1st april until the date of actual payment.
Section 234C: This applies when you miss individual instalments throughout the year. Even if you eventually pay 100% by March 31st, missing out June, September, or December then the deadlines attracts interest at 1% per month on the amount that was due at each instalment.
The penalties might seem small at 1%, but on a tax liability of 1.5 Lakhs it adds up to INR 4,500 just for interest.
Can you pay everything at the ITR filing?
ITR filing usually happens between July and October, so your tax dues are already several months overdue. Sections 234B and 234C have already started adding interest charges. By the time, your 1.5 lakh tax bill could become 1.6 or 1.7 lakhs or more depending on how late you are.
So, technically yes you can pay at the ITR filing but financially it is going to cost you more and to avoid that you pay in those instalments at every quarter. Estimate your income at the start of the year itself and calculate your tax liability and set reminders for each tax advance due date.
In conclusion, advance tax is not a punishment but just a system to manage tax payment. Paying in four instalments is far easier on your cash flow than a final huge bill plus interest penalties. Hence, start calculating your total income for the year in the beginning itself and if your tax dues exceed INR 10000 then make advance tax part of your calendar and mark reminders.
