Advance Tax Calculation And The Installments And Provisions

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Advance Tax Calculation And The Installments And Provisions: Going by the taxpayer’s distress and happiness journey, advance tax calculation can be put like this. If you pay advance tax, you are much less depressed by 31st March and do not feel like a fool and the 1st of April! Well literally so to say! Advance tax calculation is done to pay tax evenly throughout the year and to offload the year-end burden and spread it across the year. It is like tax payment in installments.

Advance Tax Calculation And The Installments And Provisions

Advance Tax Calculation

What is an advance tax under the Income Tax Act, 1961?

Before we go on with the mechanism of advance tax calculation, it is important to understand what advance tax is and who are eligible to pay the same.

As per Section 207 of the Income Tax Act, 1961, “Every assesse shall estimate his income and tax liability for any previous year and income tax so estimated shall be paid in advance by the manner given u/s 211 of the Income Tax Act,1961”.

The provision of advance tax is also known as pay as you earn. This is because advance tax calculation is done simultaneously with the earnings, mostly after taking reference from the previous year’s earnings.

Advance tax calculation: who is eligible?

As per Section 208 of the Income Tax Act, 1961:

  • Any taxpayer whose yearly tax liability exceeds INR 10,000 after all deductions are eligible to pay advance tax.
  • For advance tax calculation, Education Cess and Secondary higher education cess will also be included to calculate this limit of INR 10,000.
  • So, any person with a tax liability higher than INR 10,000 comes under the advance tax bracket.
  • Even an NRI with income accruing in India more than INR 10,000 is eligible for advance tax calculation and payment.

Advance tax calculation and payment: who are exempt?

Following categories of assesses are not required to make advance tax calculation and payment:

  • Resident senior citizens do not fall in this bracket advance tax calculation unless they have any income from business or profession.
  • Advance tax calculation is no longer tedious. This is because nowadays, most employers deduct TDS. Such employees (whose salaries are given after TDS deduction) need not go for advance tax calculation nor pay advance tax.
  • Again, in the case of professionals with up to INR 50 lakhs of yearly gross income (as receipts from services given), there is no requirement of advance tax calculation and payment. However, such people should pay 100% of their advance tax by 15 March under the presumptive taxation scheme of Section 44ADA of the Income Tax Act, 1961. Such professionals include:
  • Lawyers
  • Doctors
  • Engineers
  • Architect
  • Technical consultants
  • Accountant
  • Interior business owners
  • Advance tax calculation and payment is also not required for small businesses that have opted for presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961 and are, therefore, not required either to maintain books of account or to get yearly audits done. Such people should also pay 100% advance tax by 15 March.

Advance tax payment due dates

The Income Tax Act, 1961 provides for the allocation of sizable portions of the advance tax to be paid by specified dates of the calendar. These are as follows:

Due dates for advance tax paymentPercentage of tax paid as an advance tax (%)
Up to 15 June15%
Up to 15 September45%
Up to 15 December75%
Up to 15 March100%

The second installment of advance tax due on 15 September

September is mid-way through the financial year (Apr-Mar). It is the 6th month of the financial year beginning April.

So, the idea is to offload almost half the tax burden by September. The first quarter ending June 15 helps to lessen the tax burden by 15%, the second quarter ending helps to lessen the burden by another 30% making the entire portion equal to 45%.

Therefore, the Income Tax Act, 1961 provides for paying 45% of the yearly tax liability by the 15th of September of the ongoing financial year.

Advance tax calculation procedure

Advance tax calculation and payment is made through challan 280

Advance tax calculation mechanism is the calculation of the total tax liability for the entire year based on last year’s income after addition of education cess, surcharge and secondary and higher education cess and deduction of TDS, credit, etc. and any other relief.

Following are steps for advance tax calculation:

Income includes all kinds of incomes from salaries, interest and capital gains. These are to be added to determine income for advance tax calculation.

For advance tax calculation, freelancers can deduct their expenses from their income if they have not opted for presumptive taxation scheme. These include rent of office, electricity, phone, and net connection charges, travel expenses, depreciation on assets, etc.

  • Deductions under section 80C

All premiums paid, and investments made which are eligible for deduction under Section 80C can be deducted to arrive at the taxable income for advance tax calculation.

  • Add surcharge and education cess

The surcharge, education cess, and secondary and higher education cess must be added to the taxable income of the assesse for advance tax calculation.

  • Determine tax based on the income tax rates on different slabs

Based on the tax rates for different slabs of income, the designated percentage of income arrived at in the previous step is the payable advance tax for the running financial year.

  • This advance tax calculation is the advance tax payable for the entire year. Quarterly advance tax installment limits are calculated based on designated percentages for respective due dates (viz. 15 June, 15 September, 15 December and 15 March).

The process of advance tax calculation can be underlined head-wise as follows:

The process of advance tax calculation can be underlined head-wise as follows:

Heads of income, charges & deductions (in INR)

Total income tax on taxable income                   —————–

Add: Education cess                                         —————–

Add: Secondary and higher education cess         —————–

Add: Surcharge                                                —————–

Less: TDS or tax credit or

any other tax already paid                                 —————–

Less: Tax savings through investments, deductions,

under Section 80C of the Income Tax Act, 1961&

expenses of freelancers, etc                              —————–

Taxable income for advance tax payment (a)     —————–

Percentage of tax on (a) based on slab rates

(total advance tax)                                          —————–

Exemption from advance tax calculation and payment under the presumptive tax scheme

The scheme of presumptive taxation gives relief to small businesses, etc. by exempting them from:

  • maintaining books of account,
  • conducting yearly audits, and
  • from paying advance tax in 4 installments under Section 44AD

Presumptive taxation under Section 44AD of the Income Tax Act, 1961

Presumptive taxation scheme exempts advance tax calculation and payment for the following categories of assesses:

  • Individual tax-payers resident in India
  • A Hindu Undivided Family (HUF)
  • Partnership firm except for partnership firms with limited liability,

only if the yearly gross income of the individual or the annual turnover of the business is less than or equal to INR 2 crore.

Here, it is to be noted that exemption from advance tax calculation and payment under the presumptive taxation scheme is not available to a company.

Calculation of income for presumptive taxation scheme under Section 44AD

Any assesse who is eligible for presumptive taxation scheme must calculate his presumptive income for 100% advance tax calculation. This presumptive income is calculated at 8% of the gross income/ receipts or annual turnover of the previous year.

It is to be noted that if the presumptive income is calculated at 8%, the assesse cannot claim a deduction for depreciation and other charges under Section 30 of the Income Tax Act, 1961.

Advance tax calculation in case of presumptive taxation under Section 44AE of the Income Tax Act, 1961

Under Section 44AE of the Income Tax Act, 1961, a specific category of business can opt for the presumptive taxation scheme for determining taxable income. This is specifically for people in the business of leasing, hiring or plying of goods carriages up to a maximum of 10 goods carriages.

This section applies to an individual, a HUF, a partnership or a company, alike.

However, this category of business is not exempt from paying advance tax in quarterly installments on the four designated dates; viz. 15 June, 15 September, 15 December and 15 March.

What if the assesseemisses the advance tax installment due dates (Section 234B and 234C of the Income Tax Act, 1961)

In case of non-payment or underpayment of advance tax, interest is charged on the outstanding amount of the advance tax payable @1% per month. Part of a month is taken as a full month for this purpose.

In the advance tax calculation process, the interests are chargeable under Section 234B and 234C of the Income Tax Act, 1961.

In case of total payment of advance tax, default in payment or payment less than 90% of the actual assessed will be charged interest @1% per month on the outstanding amount (which is the difference between the assessed tax and advance tax). This is provisioned under Section 234B.

Interest on default of advance tax calculation and payment is provisioned under Section 234C of the Income Tax Act, 1961.

In case of installments of advance tax, interest is charged @1% per month on the amount outstanding (that is the difference between the actual tax and advance tax):

  • If the advance tax is less than 12% of the actual tax assessed for installment due on 15 June
  • If the advance tax is less than 36% of the actual tax assessed for installment due on 15 September
  • If the advance tax is less than 75% of the actual tax assessed for installment due on 15 December
  • If the advance tax is less than 100% of the actual tax assessed for installment due on 15 March

Thus, all in all, advance tax calculation is dependent on a host of factors from the employment type and income earned, the age and residence and the presumptive taxation advantage available.

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