In this article, Samadrita C Bhattacharjee, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on advance tax.
Introduction
The Income-tax Act, 1961 is an Indian Parliamentary Act which lays out the groundwork for the imposition, accumulation, management and return of income-tax in India. It acts as the standard measure of regulating taxation in the country. The Government of India had drafted a bill known as the “Direct Taxes Code” with the intention of replacing the Income Tax Act of 1961 and the Wealth Tax Act of 1957. The bill was later discarded as the wealth tax act was abolished by the government.
The Taxation Laws (Second Amendment bill) of the Act was introduced by Finance Minister of India, Arun Jaitley on 28th November 2016, after nationwide demonetisation of 500 and 1000 rupee notes. It was passed in the Winter Session of Indian Parliament by Lok Sabha Speaker Sumitra Mahajan.
What is advance income tax?
Advance income tax refers to the tax paid before the end of each financial year. It is also known as the “pay as you earn scheme” and is payable in the same year that the income is received if the estimated income tax liability is more than 10,000 in a financial year. The receipt of the advance income tax generates a constant flow of income for the government on a quarterly basis and is a mechanism to incur the expenses in the same year.
Who needs to pay advance income tax?
As per Section 208 of the Income Tax Act of 1961, advance income tax is pertinent to individuals who have a steady income apart from their salaries. If the total tax liability of a taxpayer is Rs 10,000 or higher in a financial year, it is mandatory for him to file advance tax. This applies to all taxpayers including salaried personals, freelancers and businesses. People who are 60 years or older, ie. senior citizens who do not have any commercial engagement are excused from advance income tax.
Salaried personals, freelancers and businesses who earn a high income from sources, besides their regular income, then, after adjusting for expenses or loses, need to pay advance income tax.
While TDS on salaries are deducted by employers, advance income tax is paid on other income that is not subject to TDS. Self-employed professionals and businessmen need to pay taxes in advance as, given the income of their business, the liability can be huge. The same applies in case of companies and corporates.
In case of presumptive businesses, the taxpayers who have opted for the presumptive business scheme, where the income of the business is assumed at 8% of the turnover of less than 2 crores in INR, are exempt from payment of advance income tax. (FY 2017-18)
Illustrations
** Mrs Bose fits the criteria as mentioned in Section 44AD of the Income-tax Act with respect to the nature of her business. She can opt for the provisions under the relevant section and declare income at 8% of the turnover. Any taxpayer who opts for the presumptive taxation scheme of this section is liable to pay advance income tax in respect of the business he is engaged in. Thus, if Mrs Bose adopts the provisions under the relevant section of the Income-tax Act, she is also liable to pay advance tax in respect of income generated from such a business.
** In this case, Ms Vibha is obliged to pay advance tax as per the income generated from her pharmaceutical business if the estimated tax liability for the financial year is Rs. 10,000 or more. The taxable income of Ms Vibha is Rs. 2,44,000, hence the taxation on Rs. 2,44,000 will be zero. Therefore, Ms Vibha does not have to pay advance tax. |
For the financial year 2018-19, the rates of advance tax as relevant to individuals below 60 years of age are as per this list.
As per Section 87A of the Income-tax Act of 1961, a taxpayer, who is a resident of India, will be granted a rebate of Rs. 2,500 or 100% of his tax liability, whichever is lower, if his total income does not exceed Rs. 3,50,000. In addition to the rebate, there will also be an added health and education cess of 4% that will be levied on the amount of tax payable by the individual.
Schedule for payment of advance income tax
Advance income tax is to be paid in three to four different instalments in every quarter of the year. The due dates for payment of those instalments are as mentioned below:
Advance tax schedule for self-employed and businessmen:
| Due date | Amount to be paid |
| On or prior to September 15th | At least 30% of the advance tax liability |
| On or prior to December 15th | At least 60% of the advance tax liability |
| On or prior to March 15th | 100% of advance tax liability |
For individuals and corporate taxpayers apart from those who are eligible under Section 44AD or Section 44ADA of the Income-tax Act, 1961:
| Due date | Amount to be paid |
| On or prior to June 15th | 15% of advance income tax |
| On or prior to September 15th | 45% of advance income tax |
| On or prior to December 15th | 75% of advance income tax |
| On or prior to March 15th | 100% of advance income tax |
For taxpayers who have opted for presumptive taxation scheme having business income from various activities like plying, hiring or leasing of goods carriages under Section 44AD or Section 44ADA:
| Due date | Amount to be paid |
| On or before June 15th | Nil |
| On or before September 15th | Nil |
| On or before December 15th | Nil |
| On or before March 15th | 100% of advance tax |
- Note (1): Any tax paid till March 31st is always treated as advance income tax.
- Note (2): As per Circular No. 674, dated 14/01/1994 states that if the last day for payment of any instalment of advance income tax is a day on which the banks are closed, then the payment should be made on the following working day.
IllustrationDr Das is a surgeon. Although Dr Das is in a profession specified under Section 44AA(1), she hasn’t opted for the presumptive taxation scheme under the relevant section of the Act. Her tax liability for the financial year 2018-19 is estimated at Rs. 1,10,000. By when should she pay advance income tax and how much? ** If the estimated tax liability of a taxpayer is Rs. 10,000 or more, then she has to discharge her tax liability in the form of advance income tax. Advance income tax is to be paid in different instalments. |
The due dates for payment of different instalments of advance tax are as follows:
For individuals and corporate taxpayers who are eligible assessee as referred to in Section 44AD or Section 44ADA:
| Due Dates | Amount to be paid |
| On or prior to June 15th | 15% of advance tax |
| On or prior to September 15th | 45% of advance tax |
| On or prior to December 15th | 75% of advance tax |
| On or prior to March 15th | 100% of advance tax |
For taxpayers who have opted for presumptive taxation scheme having business income under the relevant section of the Act.
| Due Date | Advance Tax Payable |
| On or prior to June 15th | Nil |
| On or prior to September 15th | Nil |
| On or prior to December 15th | Nil |
| On or prior to March 15th | 100% of advance tax |
Dr Das being a surgeon is in a profession specified under section 44AA(1) but she hasn’t opted for the presumptive taxation scheme under the relevant section. Therefore, Dr Das has to pay advance tax in four instalments as mentioned: Her first instalment of advance tax will fall due on June 15th, 2018. She has to pay 15% of her tax liability in advance and hence, she has to pay Rs. 16,500 on account of advance income tax by June 15th, 2018.
The second instalment of advance tax will be due on September 15th, 2018. By September 15th, she should pay 45% of her income tax liability in advance, i.e., Rs. 49,500. Assuming that she has already paid Rs. 16,500 as advance income tax by June 15th, she should pay a balance of Rs. 33,000 on account of advance tax by September 15th, 2018. Thus, the total payment of advance tax till September 15th will amount to Rs. 49,500.
Her third instalment of advance tax will be due on December 15th, 2018. By December 15th, she should pay 75% of his liability in advance, i.e., Rs. 82,500. Assuming that she has already paid Rs. 49,500 as advance tax till September 15th, Dr Das should pay a balance of Rs. 33,000 on account of advance tax by December 15th, 2018. Thus, the total payment of advance income tax made till the December 15th, 2018 will amount to Rs. 82,500.
Her fourth and last instalment of advance tax will be due on March 15th, 2019. By March 15th, she should pay 100% of her income tax liability in advance, i.e., Rs. 1,10,000. Assuming that Dr Das has already paid Rs. 82,500 as advance tax till December 15th, she should pay a balance of Rs. 27,500 on account of advance tax by March 15th, 2019. Thus, total payment of advance income tax till March 15th, 2019 will amount to Rs. 1,10,000.
Mode of payment of advance tax
According to Rule 125 of the Income-tax Rules, 1962, it is mandatory for corporate taxpayers (i.e., companies) to make their payment of advance income tax only through the electronic payment mode, ie. by using internet banking facilities of the authorised banks (refer to the section below). Individual taxpayers other than companies, who are required to get their accounts audited, are to make payment for their advance tax only through the electronic mode using the internet banking facilities of the authorised banks. For any other taxpayer, there are two options to make the payment for advance income tax. They can either make their tax payment by electronic payment mode or by depositing the challan at the receiving banks.
Steps to be followed for payment of advance income tax
Individuals who do not need to get their accounts audited may make their payment of advance income tax using tax payment challans at bank branches authorised by the Income Tax (I-T) Department. It can be deposited at one of the 926 branches of any of the banks from this section. Taxpayers may also pay their taxes online through the I-T department or the National Securities Depository.
The steps to be followed to make e-payment of advance income-tax are as mentioned in this document.
What happens in case of non-payment?
If a taxpayer fails to make payment of the advance income tax in the first quarter or the amount paid is less than 30% of the total liability by the first deadline (September 15th), he needs to pay an interest which is computed at 1% simple interest per month on the defaulted amount for a period of three months.
The same interest penalty would apply if he fails to pay the second deadline (December 15th) and the third and last deadline (March 15th) would mean paying 1% simple interest on the defaulted amount for every month until the instalments of the advance tax are fully cleared.
What if advance income-tax paid is more than required?
If a taxpayer makes a payment that is higher than his total tax liability, he or she will receive the excess amount as a refund. If the amount paid is more than 10% of tax liability, the Income-tax department will pay him an interest of 6% per annum on the excess amount paid by him.
Conclusion
The provisions relating to payment of advance income tax help both the government and the taxpayers. By collecting the tax in easy instalments it aids the taxpayers as they do not have to stress about paying a lump sum amount at a time. The process also speeds up the collection process and increases the state fund as the government earns an interest on the collected tax on a regular basis. The quarterly schedule saves taxpayers from defaulting on their income tax payments and helps businesses manage their finances systematically.
