How to pay the correct amount of advance tax during the financial year

The income tax department requires that we pay the tax due on our income before specific dates during the financial year. This is known as advance tax. Usually, employers take care of this requirement for the salaried individuals via tax deducted at the source each month. In this article, we discuss how others (professionals, freelancers and business people) can pay the right amount of advance tax during the financial year.

Any taxpayer with a tax liability of more than Rs. 10,000 per FY should pay advance tax. Only senior citizens who do not have an income from a business or profession are exempt from this. For salaried taxpayers, the employer takes care of advance tax payments.

However, if they have income from other sources or capital gains that are significant, then they too must ensure advance tax payment norms are met. See: When should I pay tax after redeeming from mutual funds or shares?

Advance Tax Payment Deadlines

• On or before 15th June 15% of total tax liability.
• On or before 15th September 45% of total tax liability.*
• On or before 15th December 75% of total tax liability*.
• On or before 15th March 100% of total tax liability*.

* excluding amt already paid. Total tax liability corresponds to the full financial year.

If we delay payment or do not pay the right amount of advance tax, then we may need to pay interest at the rate of 1% per month (see the above-linked article for details). This interest will usually be charged at the time of tax filing.

For example, suppose you received an additional income of Rs. one lakh at some point in the FY but did not include it for computation of advance tax, the IT return application will charge the necessary interest for this. The same applies to capital gains and dividends too.

We need to provide the quarterly breakup (in line with the above dates) of capital gains and dividends. If after doing this, the tax we paid does not correspond to the total income during each period, interest will be levied.

Therefore it is important to pay the right amount of advance tax at each interval. The biggest challenge for the non-salaried is the irregular cash flow. Some months would be good and some months terrible in terms of income.

So estimating the total tax liability will be hard and yet one will have to do it or pay the penalty. Therefore we recommend the following:

1. Estimate the annual income before each advance tax deadline. If you expect income to improve wrt last financial year, factor this in too.
2. Factor in tax deductions (80C, 80D etc) and all expenses that need to be deducted from income (only for businessmen or professionals). This is the net taxable income.
3. Try to pay 25% of the tax due on the net taxable income by June 15, another 25% by Sep 15, another 25% by Dec 15 and the remaining 25% by March 15th.
4. If we lesser tax in the first two deadlines, the tax liability in the latter part of the FY will become huge. It is better to uniformly distribute the tax across the FY.
5. Even if you end up overestimating the tax due, you can easily get it back via a refund after filing returns. Return forms were ready by late April for this assessment year. So we can file it early to get the refund early.
6. It is better to ensure cash necessary for advance tax payments is kept untouched for quarterly payments. If not, a sudden chunk has to be paid as advance tax inconveniencing both professional and personal needs.
7.  If a huge inflow of cash is expected before or after several dull months, it is better to pay the corresponding advanced tax immediately.

In summary, advance tax payments should be dealt with the utmost seriousness by all taxpayers. With some planning and anticipation of future income, one can easily pay the correct amount of advance tax in time without penalties.