The Advance Tax Concept

Though I believe that the taxes should be paid after the income is earned but the Government of India has always been keen to get its taxes at the earliest and hence the concept of accrual pitched in. However, it is nothing to get surprised as wealth is something anyone would prefer to have as soon as possible so our Government is doing no different.

A. Basic Idea

This is one of the reasons why the revenue authorities bought in the concepts of Tax Deducted at Source (TDS), Tax Collection at Source (TCS) and Advance Tax. 

• Advance tax is an estimate based tax payment system where taxes are paid in four (4) instalments throughout the year.
• It is applicable where the tax liability of the assessee is more than Rs. 10,000 in the financial year.
• It is calculated after getting the credit of TDS, TCS, if any deducted on behalf. 
• Resident senior citizens not having income from PGBP have been done away with the liability to pay advance tax.
• Taxes paid till the 31st day of March are treated as advance tax.
• Assessees opting to pay taxes using Presumptive Taxation Scheme (PTS)* shall pay advance tax in one instalment on the 15th day of March.
• Default in payment of instalments will lead to payment of simple interest @1% per month on tax due.
• Following are the due dates of Advance Tax with the percentage of liability:

* The concept of PTS shall be covered in the next blog

B. Example:

Raman Pareek, a resident of India is having the following income during the Financial Year 2020-21. Calculate his liability of advance tax for the said year if he presumes that he will earn the below - mentioned income in the said financial year.

1. Income from Salaries - Rs. 500,000

2. Income from Business - Rs. 200,000

3. Income from Interest on Savings Bank Account - Rs. 2,000

4. Income from House Property - Rs. 50,000 

Assuming all the deductions and exemptions under the Income Tax Act is not to be claimed by him and there is a credit of TDS & TCS of Rs. 5,416.

Solution:

Total Income of Raman = Rs. 752,000

Total Tax Payable by Raman

On 250,000 = NIL

On next 250,000 = 250,000 x 5% = 12,500

On balance 252,000 = 252,000 x 20% = 50,400

Cess on above tax = 62,900 x 4% =2516

Therefore, total tax payable by Raman = Rs. 65,416

Since, there is a credit of TDS & TCS of Rs. 5,416 the liability of advance tax shall be calculated after utilising the same.

Therefore, advance tax shall be calculated on Rs. (65,416 - 5,416) = Rs. 60,000

Calculation of Advance Tax Liability:

1st Instalment = 15% x 60,000 = Rs. 9,000

2nd Instalment = (45% x 60,000) - amount paid above

                                 = Rs. (27,000 - 9,000)

                                 = Rs. 18,000

3rd Instalment = (75% x 60,000) - (18,000 + 9,000)

                                 = Rs. (45,000 - 27,000) 

                                 = Rs. 18,000

4th Instalment = (100% x 60,000) - (18,000 + 18,000 + 9,000)

                                 = Rs. 15,000

C. Questions

Let's have a few MCQ's in relation to above. Please leave your answers in the comment below:

•  In how many instalments does advance tax gets paid off normally?

1. One
2. Two
3. Three
4. Four

• How much advance tax do I need to pay if I am earning a total Income of Rs. 50,000?

1. Rs. 500
2. Rs. 2000
3. Rs. 1000
4. NIL

I hope you must have understood the basic idea of Advance Tax. Please put your queries in the comment section below and I shall be happy to answer them.

Disclaimer: These are just basic concepts. However, the applicability of the law shall depend on case to case basis. 

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Thank you for reading!!